40 3 Reduction of External Funding Needs
and cash management (cash pooling, netting, the use of a payment factory). Inven-
tories can be reduced, for example, through outsourcing and just-in-time manufac-
turing.
From a financial perspective, it is common wisdom to collect fast and pay slow.
On the other hand, the firm’s collection and payment practices signal something to
its suppliers and customers and influence their behaviour. For example, a fast
payer can obtain better terms and better service, and a customer may regard pay-
ment time as an ancillary service.
3.4.2 Management of Accounts Payable
Introduction
In most bilateral transactions, each party has to perform all or part of its obliga-
tions at about the same time that the other party has to perform its obligations. For
example, in a purchase and sale contract, the buyer will have to pay the seller or
make arrangements for it to be paid at more or less the same time that the seller
ships the goods to the buyer.^71
However, there can be an intertemporal value transfer. For example, the differ-
ence between the time of purchase and the time of payment can allow a retailer to
await payment from its own customers before paying its suppliers.
Accounts payable are one of the usual sources of funding. There are many ways
to manage accounts payable. A supplier can permit the firm to pay later. The firm
may be able to influence its payment terms or decide to pay late.^72 In addition,
some firms buy goods on a consignment basis.
Payment Terms
How the firm can use payment terms to its own benefit and as a way to raise ex-
ternal funding depends on the size of the firm, the nature of the goods or services
bought by the firm, and other things.
Main rule. The firm usually does not pay interest on trade debts that it pays on
time. In addition, the seller can sometimes grant a discount for prompt payment.
The firm may have a legal obligation to pay interest for late payment.
(^71) Bradlow DD, Some lessons about the negotiating dynamics in international debt transac-
tions. In: UNITAR, Problems and Perspectives of Debt Negotiations, DFM Document
Series, Document No 9, Geneva (April 2000).
(^72) Accounts not receivable, The Economist, September 2008: “A recent survey of large
public companies in America conducted by REL, a consultancy, and CFO ... shows that
... the number of days it takes companies to collect money owed to them ... hit an aver-
age of 41 in 2007, up from 39.7 in 2006 ... When America went into recession in 2001,
DSO averaged 38.9. In Europe and Asia average DSOs lie in the high 50s (credit terms
tend to be easier than in America) ... Chaos in the banking system is also causing man-
agers to think twice about paying promptly ... By putting off payments to creditors,
treasurers can conserve cash and thus reduce their reliance on nervous bankers.”