8/19/2019 Ch 07 Managing Payable s Tsm

1/19

Spontaneous Sources of

Financing Denition  a nancing source occurring spontaneously

from operations

Examples  payables

  accruals

8/19/2019 Ch 07 Managing Payable s Tsm

2/19

 Types of purchase terms

Cash in advance

Cash on delivery

Cash term

Prox

Seasonal dating

Consignment

8/19/2019 Ch 07 Managing Payable s Tsm

3/19

Cash in advance (CIA)/Cash before

delivery (CBD) Safest form of payment

Payment must be received before the order is

shipped.

hen the seller dose not !ant to ta"e ris" of

buyer not payin#

$irms usin# CIA don%t need to run credit

administration or incur bad debt.

8/19/2019 Ch 07 Managing Payable s Tsm

4/19

Cash on delivery

&aterial shipped to the buyer' cash

must be paid upon delivery.

uaranteed payment Cost of runnin# credit admin dept and

default ris" is minimied

&ay have to incur shippin# cost if the

payment is not made.

8/19/2019 Ch 07 Managing Payable s Tsm

5/19

Cash terms/ payable upon receipt of

invoice

Seller incur admin costs in monitorin#

payment and runs the ris" of bad debt

and delayed payments

8/19/2019 Ch 07 Managing Payable s Tsm

6/19

Prox

With Prox proximate! term" all invoicesdated prior to a predened cuto# period

are payable by a specied date the

follo$ing month% The term &'()" prox net *) means the

same as +&'()" net *), except that the

() and *) refer to the () and *) of thenext month%

8/19/2019 Ch 07 Managing Payable s Tsm

7/19

Seasonal datin#

$or hi#hly seasonal items Payment is due after the end of the buyer%s

sellin# season.

*/+,'net -, datin# +*, means that the time !illstart after +*, days from the date of invoice.

Seller is able to smooth production

ransfer the ris" of obsolescence from seller tobuyer

8/19/2019 Ch 07 Managing Payable s Tsm

8/19

Consi#nment terms

he seller ships the #oods to the buyer !ho has

no obli#ation to pay until the #oods have been

sold or used.

It adds admin burden to both buyer and seller

Cash flo! may be delayed si#nificantly

Seller is someho! protected by retainin# the

title of the #oods

8/19/2019 Ch 07 Managing Payable s Tsm

9/19

Payables Decisions and theCash Flo$ Timeline

 

ime 0ime 0

PurchasePurchase CashCash CreditCredit

DateDate Discount DateDiscount Date PeriodPeriod

 

ime 0ime 0

PurchasePurchase CashCash CreditCredit

DateDate Discount DateDiscount Date PeriodPeriod

8/19/2019 Ch 07 Managing Payable s Tsm

10/19

-asic Principles

.ever pay early" pay on the last day of/  the discount period" or

  the credit period

 Ta0e a cash discount $hen/  implied interest rate 1 opportunity rate

Stretch only as a last resort" not as apolicy

8/19/2019 Ch 07 Managing Payable s Tsm

11/19

Payment Decision 2odel

When days delayed 3 discount period

When days delayed 1 discount period

When days delayed 1 credit period

8/19/2019 Ch 07 Managing Payable s Tsm

12/19

When Days Delayed 34Discount Period .P5 4 6P x (7d! ' ( 8 DD0'*9:!!!

8/19/2019 Ch 07 Managing Payable s Tsm

13/19

When Days Delayed 1Discount Period .P5 4 6P ' ( 8 DD0'*9:!!!

8/19/2019 Ch 07 Managing Payable s Tsm

14/19

8/19/2019 Ch 07 Managing Payable s Tsm

15/19

 Ta0e or ;eave a Discount

6P x (7d! 3 6P ' ( 8 CP7DP!x0'*9:!!

0 3 d'(7d!! x *9:'CP7DP!!

8/19/2019 Ch 07 Managing Payable s Tsm

16/19

Ethics and the PaymentDecision

op ier1 &a"e a commitment of the !ill to enhance theop ier1 &a"e a commitment of the !ill to enhance the

!ell2bein# of our nei#hbors!ell2bein# of our nei#hbors

op ier1 &a"e a commitment of the !ill to enhance theop ier1 &a"e a commitment of the !ill to enhance the

!ell2bein# of our nei#hbors!ell2bein# of our nei#hbors

&iddle ier1 he 3Sun 4i#ht5 test1 ould both interested 6&iddle ier1 he 3Sun 4i#ht5 test1 ould both interested 6

impartial observers find my decision to be prudent 6 sound.impartial observers find my decision to be prudent 6 sound.

&iddle ier1 he 3Sun 4i#ht5 test1 ould both interested 6&iddle ier1 he 3Sun 4i#ht5 test1 ould both interested 6

impartial observers find my decision to be prudent 6 sound.impartial observers find my decision to be prudent 6 sound.

4o!er ier1 Does the decision obey the intent and letter4o!er ier1 Does the decision obey the intent and letter

of the la!7of the la!7

4o!er ier1 Does the decision obey the intent and letter4o!er ier1 Does the decision obey the intent and letter

of the la!7of the la!7

8/19/2019 Ch 07 Managing Payable s Tsm

17/19

2onitoring the Payables-alance Payables turnover approach

  Period purchases '

8/19/2019 Ch 07 Managing Payable s Tsm

18/19

2onitoring the

8/19/2019 Ch 07 Managing Payable s Tsm

19/19