Page 62 - FINAL CFA SLIDES DECEMBER 2018 DAY 11
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Accounts Payable Management, p. 89 Session Unit 11:
38. Working Capital Management
If the firm pays its payables prior to their due dates, cash is used unnecessarily and
interest on it is sacrificed. If a firm pays its payables late, it can damage relationships
with suppliers and lead to more restrictive credit terms or even the requirement that
purchases be made for cash. Late payment can also result in interest charges that are
high compared to other sources of short-term financing.
tanties
Typical terms on payables (trade credit) contain a discount available to those who pay quickly as
well as a due date. Terms of “2/10 net 60” mean that if the invoice is paid within ten days, the
company gets a 2% discount on the invoiced amount and that if the company does not take
advantage of the discount, the net amount is due 60 days from the date of the invoice.
The cost to the company of not taking the discount for early payment can be
evaluated as an annualized rate:
