BUSF_A01.qxd

Trade payables

a new piece of plant is purchased at the end of an accounting year, the tax relief will

first manifest itself in cash flow terms a year earlier than if the acquisition is delayed

for the short period until the start of the new accounting year.

Manage exchange rate exposure

Where the business holds cash in an overseas currency, there is the danger that an

adverse shift in the exchange rate will reduce the value of the funds. This will be dis-

cussed at some length in Chapter 15.

13.10 Trade payables (trade creditors)

Trade payables represent money owed for goods and services purchased on credit by

the business. It is the other side of the coin from trade receivables; one business’s trade

receivables are another’s trade payables. Worldwide it will be true that the total of all

trade receivables is equal to the total of all trade payables.

As we saw in Section 13.8, in 2007, the average payment time taken by credit

customers was 61 days (Guthrie 2007). Table 13.1 (page 354) shows that trade credit

is a significant source of finance for all five of the businesses highlighted. The table

also shows how the use of trade credit seems to differ from one business to another.

Thus, trade credit is an important source of ‘free’ finance, which should be taken

seriously.

That trade credit is strictly free is doubtful, since suppliers will build the cost of

granting credit into their pricing policies. However, unless suppliers are willing to

discriminate in their pricing between those who settle their bills immediately and

those who do not, there is no obvious differential cost of taking credit. There may be

less obvious costs involved so, as ever, the balance must be sought between that cost

and the cost of not taking trade credit.

The costs and risks of taking credit

The costs and risks of taking credit are considered below.

Price

Some suppliers might offer cheaper prices for immediate settlement – in effect a dis-

count for prompt payment. Cash-and-carry wholesalers in the grocery trade are exam-

ples of businesses that are prepared to offer lower prices because they do not offer

credit (or delivery). The small retail grocer has the option of dealing with wholesalers

who offer credit but who usually also charge higher prices.

Possible loss of supplier goodwill

If credit is overstepped, suppliers may discriminate against delinquent customers if

supplies become short. As with the effect of any loss of goodwill, it depends very

much on the relative market strengths of the parties involved.

Administration and accounting

Taking credit almost certainly engenders administrative and accounting costs that

would not otherwise be incurred.