Question

A company needs to develop an objective for paying bills. Do they want to stretch their cash flow as far as they can? Do they want to have a good reputation of always paying bills on time? Do they want to be sure to get paid by their customers before they pay their vendors? Discuss what would be the best payment terms to use for each objective and its impact on the company?

Answer 1

You should pay your bills on time to maintain a good reputation in your business community but never pay your bills before they are due as it will affect your cashflow. Your credit rating may fall if you default on your account payables whether it is short term payables or long term loans. Stretching cashflow as far as they might not be a good idea because cash flows not always mean profits if there are more cash outflows than inflows we need to cut out our costs or increase our revenues so that more and more cash flows turn into profits and help the company grow though there are many ways to stretch the cash flows such as using financial reserves, selling of current assets, refinance debt by using equity and there are many more ways to do that. It may not be always possible to get paid by customers before giving money to vendors, that is why the company should always follow as flexible credit policy for sellers and buyers but it may not be too flexible to affect our cash and operating cycle.