Page 175 - Microsoft Word - 00 ACCA F9 IWB prelims 2017.docx

Working capital management – Accounts receivable and payable

2.2 Problems

By delaying payment to suppliers, entities face possible problems:

 supplier may refuse to supply in the future

 supplier may only supply on a cash basis

 there may be a loss of reputation

 supplier may increase prices in the future.

2.2 Early payment discount

Cash discounts maybe offered by suppliers to encourage early payment by the
company.

Cost = cash paid earlier = lower payables balance = higher working capital
funding requirement (liquidity sacrificed, funding cost increased)

Benefit = less cash paid to suppliers (profitability enhanced, liquidity
improved)

The calculations use the same techniques as those for accounts receivable.

167