Page 405 - F1 Integrated Workbook STUDENT 2018

Working capital management – receivables, payables, inventory
and cash

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 price in the future.

Trade credit is normally seen as a 'free' source of finance. Whist this is normally true,
it may be that the supplier offers a discount for early payment. In this case, delaying
payment is no longer free, since the cost will be the lost discount. In the
examination, you will need to be able to calculate the cost of this discount
foregone.

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