Week 3: Internal Controls, Cash, Shortterm Investments and Accounts Receivables
- Discussion
Trade Credit - Accounts Payable (graded)
The ability to extend trade credit is a benefit to both sides of the transaction. The seller can increase sales while
the buyer can conduct business without spending cash immediately. (For example, imagine you own a business
the sells wood to construction companies that build homes. Using trade credit, the construction company can
purchase the wood without spending cash immediately and you as the owner have more sales!) It sounds like a
perfect relationship and it would be if people were not involved.
Let’s take a look beyond the obvious and discuss the pros and cons of Accounts Receivable. Why do companies
offer trade credit, and what are the problems?
Responses
Response
Trade
Credit Accounts
Payable
Author
Dimitra Arrieta
Date/Time
9/13/2012 10:47:24 PM
An arrangement to buy goods or services on account, that is, without making
immediate cash payment is Trade credit.
For many businesses, trade credit is an essential tool for financing growth. Trade
credit is the credit extended to you by suppliers who let you buy now and pay later.
Any time you take delivery of materials, equipment or other valuables without paying
cash on the spot, you're using trade credit.
When you're first starting your business, however, suppliers most likely aren't going to
offer you trade credit. They're going to want to make every order c.o.d. (cash or check
on delivery) or paid by credit card in advance until you've established that you can pay
your bills on time. While this is a fairly normal practice, you can still try and negotiate
trade credit with suppliers. One of the things that will help you in these negotiations is
a properly prepared financial plan.
When you visit your supplier to set up your order during your startup period, ask to
speak directly to the owner of the business if it's a small company. If it's a larger
business, ask to speak to the CFO or any other person who approves credit. Introduce
yourself. Show the officer the financial plan you've prepared. Tell the owner or
financial officer about your business, and explain that you need to get your first orders
on credit in order to launch your venture.
Depending on the terms available from your suppliers, the cost of trade credit can be
quite high. For example, assume you make a purchase from a supplier who decides to
extend credit to you. The terms the supplier offers you are two-percent cash discount
with 10 days and a net date of 30 days. Essentially, the suppliers is saying that if you
pay within 10 days, the purchase price will be discounted by two percent. On the other
hand, by forfeiting the two-percent discount, you're able to use your money for 20
more days. On an annualized basis, this is actually costing you 36 percent of the total
cost of the items you are purchasing from this supplier! (360 ( 20 days = 18 times per
year without discount; 18 ( 2 percent discount = 36 percent discount missed.)
Cash discounts aren't the only factor you have to consider in the equation. There are
also late-payment or delinquency penalties should you extend payment beyond the
agreed-upon terms. These can usually run between one and two percent on a monthly
basis. If you miss your net payment date for an entire year, that can cost you as much
as 12 to 24 percent in penalty interest.
Effective use of trade credit requires intelligent planning to avoid unnecessary costs
through forfeiture of cash discounts or the incurring of delinquency penalties. But
every business should take full advantage of trade that is available without additional
cost in order to reduce its need for capital from other sources
http://wiki.answers.com/Q/Why_do_companies_offer_trade_credit#ixzz26PtP2IdE
Trade
CreditAccounts
payable
Marie Roberts
9/18/2012 12:28:19 PM
Companies may offer trade credit to encourage more or frequent buying.
And it also encourages higher volume purchasing.It can also be good for
small companies who may have limited cash on hand. Trade credit would
allow these small companies to purchase such things as inventory on a
regular basis.
A few problems that may be associated with trade credit are growing
interest fees and late payment fees for those who are extended the credit,
those who extend the credit take on the risk of bad debt when having to write
off unpaid accounts,and even accounts that go unpaid for long periods can
have negative effects because the one extending the credit has to wait on
their cash which they probably need to pay their own bills.
RE: Trade Diangelo Miller
9/20/2012 5:15:49 PM
Credit Accounts
Payable
Modified:9/22/2012 8:55 AM
the pros are you will be making money like if I created something and walmart
wanted to buy they might tell me to make a 100,000 of the item but they going to pay
me three years from now walmart being a big business i will not say no. cons can if a
company goes bankrupt while owing the money depending on the type of business
you may not recieve the money for the work.
RE:
Trade
Credit Diangelo Miller
Accounts
Payable
9/22/2012 8:58:02 AM
pro with trade credit you do not have to pay for something at the moment you
receive the good or service. con is with trade credit you pay more then you
suppose to then if you had cash.
RE:
Trade
Credit - Quintavious Mapp
Accounts
Payable
9/24/2012 9:40:03 PM
Credit is paying for the now until money starts to flow in.
Pros and
Cons of
Accounts
Receivable
Dimitra Arrieta
9/21/2012 10:37:22 AM
Pros of Factoring
Companies that don't use factoring must bill customers on their own, and it can take several months to
receive payment. In some cases, a customer may never pay his bill, and the company must write the
account off as a bad debt. When a company uses factoring, however, it can receive payment for all of
its accounts receivable immediately. Factoring also eliminates the need for a billing department, thus
allowing the company to focus its efforts elsewhere.
Cons of Factoring
Though factoring allows a company to receive money for its accounts receivable quickly, the company
typically won't receive the total amount the customers owe. Most factoring companies pay only a
portion of the value of the account. In some cases, a factoring company may pay a large percentage of
the value upfront and a small percentage later if it is able to collect on the accounts, but all factoring
companies charge a fee for their services.
http://smallbusiness.chron.com/pros-cons-accounts-receivable-financing-34107.html
Pros and
Cons of
Accounts
Receivable
Dimitra Arrieta
9/21/2012 10:38:14 AM
Pros of Factoring
Companies that don't use factoring must bill customers on their own, and it can take several months to
receive payment. In some cases, a customer may never pay his bill, and the company must write the
account off as a bad debt. When a company uses factoring, however, it can receive payment for all of
its accounts receivable immediately. Factoring also eliminates the need for a billing department, thus
allowing the company to focus its efforts elsewhere.
Cons of Factoring
Though factoring allows a company to receive money for its accounts receivable quickly, the company
typically won't receive the total amount the customers owe. Most factoring companies pay only a
portion of the value of the account. In some cases, a factoring company may pay a large percentage of
the value upfront and a small percentage later if it is able to collect on the accounts, but all factoring
companies charge a fee for their services.
http://smallbusiness.chron.com/pros-cons-accounts-receivable-financing-34107.html
RE: Pros
and Cons
of
Bruce Burbank
Accounts
Receivable
9/23/2012 7:00:14 PM
Dimitra,
What is your opinion on the two, which are you in favor of?
RE: Pros
and Cons
of
Dimitra Arrieta
Accounts
Receivable
9/23/2012 11:46:25 PM
My opinion which I favor is the con factor. I say that because a
company may pay a large percentage of the value upfront and a small
percentage later but I least they would not have a charged off account
at the end.
Pros
vs.
Cons Bruce Burbank
of AR
9/21/2012 9:30:26 PM
Companies offer trade credit as addressed above to grow business by allowing
companies to get supplies without have to pay cash immediately . This allows more
product to be moved and shows credits on the company's general journal as
revenue. This is positive until it's time to collect from companies who can not pay for
supplies received. This can cause most companies profit to suffer because of lost
revenue and uncollectible debt. Also companies have to hire personnel to collect and
track these transactions, this can be costly if your business isn't able to collect on the
debt. Most companies anticipate a percentage of lost, but if they exceed that number
it could bankrupt a company.
RE:
Pros
vs.
Professor Thomas
Cons
of AR
9/26/2012 8:08:10 PM
This is a great point Bruce! Estimating what will go bad is a science ... but at
the end of the day it is still an estimate. If a company experiences higher
losses than they estimate, it may leave them in a financial bind!
RE:
Pros
vs.
Amirah Howard
Cons
of AR
9/27/2012 7:48:12 AM
Great point, would you see yourself using this?
Trade
CreditAccounts
Payable
Marvalyn Richards
9/21/2012 9:43:09 PM
Trade credits are offered mainly to expedite delivery of goods and to form good long-lasting
business relationships. Instead of calculating and writing checks to prepare for purchasing, one
can just order and do that later. It also increases sales. The problem is some people just order
with no intention of paying, while some genuinely had intentions of paying but either the
company is not making profits as anticipated, while others will be able to pay but just have
unethical business habits. Reason why credit checks should be done before credit is offered,
though even then problems could still arise.
industries?
Professor Thomas
9/21/2012 9:54:53 PM
can anyone give an example of an industry where it is common that accounts
receivables (trade credit) is offered to customers and one where it is not common?
RE:
industries? Bruce Burbank
9/22/2012 12:58:51 PM
One company that always offer trade credit is a GMAC finance company,
they are in the business to extend credit to individuals who are in the market
to purchase a new or used vehicle. In most cases people don't have the cash
for a major expense such as vehicle purchase. One industry that doesn't
extend credit often is retail grocery stores, there aren't any 100% only grocery
stores that extend credit, because they have to pay various suppliers of the
items sold and extending credit to customers would be detrimental to business
operations.
RE:
industries? Marvalyn Richards
9/25/2012 8:14:08 PM
Furniture companies and large- appliance stores I believe normally offer trade
credit. Supermarkets and gas stations do not offer credits to individuals, but some gas
stations offer credit to compaines like UPS, Fed Ex, and The American Red Cross.
RE:
industries? Professor Thomas
9/26/2012 7:18:56 PM
Great observation. I never thought about how gas companies offer
credit to shipping companies. Does anyone have any thoughts on if
this would be beneficial for a gas company, given the changes in
oil/gas prices.
Trade
Credit Accounts
Quintavious Mapp
9/22/2012 12:21:07 PM
Payable
Companies offer trade credit because some small companies don' t have a lot money
to pay at once and the problem is that the buyer is not paying an immediate cash
payment.
RE:
Trade
Credit Marvalyn Richards
Accounts
Payable
9/26/2012 9:06:00 PM
Yes, but I believe its more of a trust issue that a money issue. Companies will be
quicker to offer established companies trade credit than a small struggling
company. They do credit checks on these companies before offering them credit. They
basically have no concern about anyone's financial situation, its just about them and
their money.
RE:
Trade
Credit - Edward Steward
Accounts
Payable
9/27/2012 7:40:43 AM
Marvalyn, I was jut thinking the same thing. If your a small business
just starting out, not to many companies will offer credit with no
history. I think even if your credit is good they may not extend trade
credit to your company, you just starting out and if you have never
been in this type of business before who to say you'll make it.
Trade
Credit
Amirah Howard
9/25/2012 9:48:07 AM
Some companies may offer trade credit to companies so they may buy more and also
build a business relationship with the company. May be they are buying for each other
to build business. The problem can be the companies may not pays as agreed with the
other company and if the business was to go under the other company would be
looking at a lost.
RE:
Trade
Credits
Edward Steward
Modified:9/25/2012 9:12 PM
9/25/2012 9:07:41 PM
Trade credit simply means that a vendor extends you credit terms, giving you extra
time to pay or giving a discount for early payment. Commercial transactions are
different, most clients ask their suppliers to deliver services immediately and then to
invoice them for the work, payable 30 days later (also known as offering net-30). In
effect, clients ask their suppliers provide them with "trade credit" for 30 days.
Although suppliers don't like offering trade credit, most have accepted it as an
industry standard and have learned how to operate and live with it. In fact, some
suppliers have even mastered how to offer trade credit and use it to better position
their companies with leading clients. Large creditworthy customers, such as the
government
Article Source: http://EzineArticles.com/25477
Problems:
1. You are unable or unwilling to pay them
2. You are reported to the credit companies
3. No one will extend you more credit
4. Credit terms require payment in less than 30 days
5. High interest rates if you are late