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CA Intermediate · Financial Management and Strategic Management

Management of Payables (Creditors) for CA Intermediate FM

Management of payables is how a firm uses supplier credit and decides when to pay. You solve it by finding the cost of trade credit, usually the cost of forgoing a cash discount, and comparing it with the cost of alternative finance. Choose the cheaper source.

What this chapter covers

This chapter sits in Section A (Financial Management) of Paper 6. It looks at the liability side of working capital. Trade creditors give you goods now and let you pay later. That credit is a source of short-term finance, and it can be free or costly.

The chapter has one core calculation: the effective annual cost of not taking a cash discount. Around it sit decisions. Should you take the discount and borrow to pay early? Should you stretch payment to the end of the credit period? Which credit period is best? Which short-term sources can fund payables?

It connects to the rest of the paper. Receivables and inventory management are the other parts of working capital. Cost of capital, interest rates and the idea of comparing annual rates all carry over. If you are comfortable with simple and compounded annual rates, this chapter is quick to score in.

Payables questions are short and formula-driven, so they suit both the 30 marks of MCQs and the 70 marks of written answers. A cost of discount question can be solved in a few lines if you know the formula. Written questions award marks for the formula, the working and the final decision, so even a small slip costs little if your steps are clear. The chapter also supports questions in working capital, where creditors appear in the operating cycle. Few students invest time in it, which makes it a reliable place to gain marks.

Management of Payables (Creditors): topics in the order to study them

  1. 1Trade Credit and Payables Management BasicsYou need the vocabulary first: credit terms, credit period, discount period and the role of creditors in working capital.
  2. 2Cost of Trade Credit and Cash Discount DecisionsThis is the core calculation of the chapter, so learn it right after the basics and practise it most.
  3. 3Credit Period Evaluation and Payment PoliciesIt builds on the cost calculation by asking how long to take credit and when to pay, which needs the cost idea first.
  4. 4Sources and Instruments of Payables FinanceStudy it last because you compare these sources against the cost of trade credit, which you must already know.

How to prepare Management of Payables (Creditors)

Keep this chapter practical. Understand the logic once, then drill a small set of problem types until the working is automatic.

  1. Read the basics and write the credit terms notation in your own words, such as 2/10, net 30: 2% discount if paid within 10 days, otherwise full payment by day 30.
  2. Derive the cost of forgoing the discount yourself: (Discount ÷ (100 − Discount)) × (365 ÷ (Credit period − Discount period)). Check that you can explain each part.
  3. Solve the standard decision: if the cost of forgoing the discount is higher than the cost of borrowing, take the discount and borrow to pay early. If it is lower, pay late.
  4. Practise questions that use 360 days and 365 days. Use the day count the question states, and state your assumption if it does not.
  5. Learn the compound (effective) version of the cost: Effective cost = [1 + Discount ÷ (100 − Discount)]^(365 ÷ (Credit period − Discount period)) − 1. Know when a question asks for it.
  6. Revise the sources of payables finance as short lists with one line on how each works, then compare them by cost in a sample problem.
  7. Finish with timed mixed sets. Write each answer as formula, working, comparison, conclusion.

Common mistakes in Management of Payables (Creditors)

  • Using 100 instead of 100 − Discount in the denominator of the cost formula.

    Fix: Write the cash paid on a ₹100 invoice first. With a 2% discount it is ₹98, so the ratio is 2 ÷ 98.

  • Using the full credit period as the days instead of credit period minus discount period.

    Fix: Ask how many extra days you keep the money by not paying early. For 2/10, net 30, that is 20 days.

  • Comparing the cost of discount with the wrong rate or on a different basis.

    Fix: Convert both to an annual rate first, then compare. Always state the basis.

  • Giving a number without a decision.

    Fix: Close every answer with a recommendation, such as take the discount and borrow, because the cost of forgoing is higher than the borrowing rate.

  • Ignoring the day count given in the question.

    Fix: Underline the day basis in the question. If none is stated, use 365 and say so in your working.

Last-day revision: Management of Payables (Creditors)

  • Trade credit is spontaneous, short-term finance from suppliers.
  • Terms 2/10, net 30 mean 2% discount within 10 days, full payment by day 30.
  • Cost of forgoing discount (simple) = Discount ÷ (100 − Discount) × 365 ÷ (Credit period − Discount period).
  • The base is the net amount you would pay, which is 100 − Discount, not 100.
  • Days used in the formula are the extra days you get by not paying early.
  • If cost of forgoing discount > cost of bank finance, take the discount.
  • If cost of forgoing discount < cost of bank finance, forgo the discount and pay on the last day.
  • Stretching payment beyond the credit period can bring penalties and damage supplier relations.
  • Compare all costs on the same annual basis before deciding.
  • Use 365 days unless the question says 360.
  • State your decision in one clear sentence at the end of the answer.

Management of Payables (Creditors) practice questions

Management of Payables (Creditors) in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Management of Payables (Creditors): frequently asked questions

What is the most important formula in Management of Payables?

It is the cost of forgoing a cash discount: Discount ÷ (100 − Discount) × 365 ÷ (Credit period − Discount period). Most numerical questions are built on it. Learn it by deriving it, not just memorising it.

How do I decide whether to take a cash discount?

Compute the annual cost of forgoing the discount and compare it with the cost of the cheapest alternative finance. If forgoing costs more, take the discount and borrow to pay early. If it costs less, pay on the last day of the credit period.

Is this chapter useful for MCQs?

Yes. Cost of discount and basic decision rules are easy to test in a one or two mark MCQ. Practise the formula until you can do it quickly, since there is no negative marking and every attempt is worth making.

Should I use 360 or 365 days?

Use the number the question gives. If it gives none, 365 is the safer choice and you should state it as an assumption. Stating the assumption protects your step marks.