CMA Intermediate · Financial Management and Business Data Analytics

Payable Management for CMA Inter Paper 11

Payable management is how a firm handles the money it owes suppliers for goods bought on credit. You decide whether to take a cash discount or pay later by comparing the discount's annualised cost with your borrowing rate. Forgo the discount and pay on the due date only if the annualised cost of foregoing it is below your alternative financing cost.

What this chapter covers

This chapter sits inside the working capital part of Financial Management. Receivables and inventory tie cash up. Payables do the reverse: they are a source of short-term finance that costs little or nothing if you manage it well. The chapter covers what payables are, how credit terms work, and when a discount is worth taking.

The core numerical skill is the cost of foregoing a cash discount. A term such as 2/10 net 30 means a 2% discount if you pay within 10 days, otherwise the full amount is due on day 30. You convert that into an annual percentage and compare it with the cost of a bank loan or overdraft. The rest of the chapter is mostly theory: payables policy, the risks of stretching payments, and techniques such as reverse factoring.

The chapter links directly to the cash conversion cycle, the operating cycle and working capital financing in the same paper. A longer payables period shortens the cash cycle and lowers working capital needs. So the same ideas can appear inside a larger working capital question.

The chapter is short and has one formula-based problem type that you can master fully, so it is a dependable source of marks. The theory sections suit short written answers and MCQs with clear right and wrong options. Because payables feed into the cash conversion cycle and working capital estimation, the same understanding also helps you in longer questions from other chapters of the paper. Regular practice here pays back quickly.

Payable Management: topics in the order to study them

1Accounts Payable Management BasicsStart here to learn what payables are, why firms hold them and the objectives of managing them, so later terms make sense.
2Trade Credit and Credit TermsYou need the language of terms such as 2/10 net 30 and the types of trade credit before you can calculate anything.
3Cash Discount Decision and Cost of Foregoing DiscountThis is the main numerical topic, and it builds directly on the credit terms you just learned.
4Payables Policy and Stretching PayablesOnce you can compute the cost of credit, you can judge when delaying payment is sensible and what it risks.
5Payables Management Techniques and Reverse FactoringFinish with the techniques and financing tools, which are mostly theory and easier to retain after the numbers are clear.

How to prepare Payable Management

Spend most of your time on the discount calculation and keep the theory for short, structured revision.

Read the basics and credit terms once and write a short list of definitions in your own words, including net period, discount period and discount percentage.
Learn the cost of foregoing discount formula: [Discount % ÷ (100 − Discount %)] × [365 ÷ (Credit period − Discount period)]. Check whether your question asks for 360 or 365 days and use what the question states.
Solve at least ten problems with different terms. Include cases with several discount options and cases where the firm must borrow to take the discount.
For each problem, write the decision line: compare the cost of foregoing the discount with the borrowing rate, then state take or forgo the discount.
Prepare a one-page note on payables policy: benefits of stretching, costs such as loss of discount, damaged supplier relations and lower credit rating.
Learn reverse factoring as a process: the buyer's approved invoices are financed by a financier, the supplier gets early payment and the buyer pays on the due date. Be ready to give advantages to both sides.
Do a mixed set of MCQs and one working capital question that uses the payables period, so you see how the chapter connects.

Common mistakes in Payable Management

Using the full credit period instead of the extra days of credit in the formula.
Fix: Always subtract the discount period first. Here the denominator uses 30 − 10 = 20 days.
Dividing the discount by 100 instead of by (100 − discount).
Fix: The real amount paid is the invoice less the discount, so the base is 100 − d. Write this step out every time.
Stopping at the percentage and not stating a decision.
Fix: Compare the result with the borrowing rate or other finance cost and write a clear take or forgo conclusion.
Ignoring the borrowing cost or comparing against the wrong rate.
Fix: Identify the cheapest alternative source stated in the question and compare only with that.
Treating stretching payables as free finance.
Fix: In written answers, list the hidden costs: lost discounts, penalties, strained relationships and a weaker credit standing.
Mixing up reverse factoring with ordinary factoring.
Fix: Remember that ordinary factoring is initiated by the supplier on its receivables, while reverse factoring is initiated by the buyer and backed by the buyer's credit.

Last-day revision: Payable Management

Payables are a spontaneous, usually low-cost source of short-term finance.
Credit terms 2/10 net 30 mean 2% discount if paid by day 10, otherwise pay in full by day 30.
Cost of foregoing discount = [d ÷ (100 − d)] × [365 ÷ (N − D)], with d as discount % and N − D as days of extra credit.
Take the discount if the cost of foregoing it is higher than your borrowing cost.
Forgo the discount only if the cost of foregoing it is lower than the cheapest alternative finance.
A longer credit period with the same discount lowers the annual cost of foregoing the discount.
Stretching payables means paying after the due date, and it can cost you supplier trust, credit rating and future discounts.
A longer payables period shortens the cash conversion cycle.
Reverse factoring is buyer-led: the supplier gets early payment against the buyer's approved invoices.
In reverse factoring, the financier relies on the buyer's credit strength, so the supplier can get cheaper finance.
Write the comparison and the decision line in every numerical answer, since it earns marks.
Use the number of days stated in the question, 360 or 365, and do not mix them.

Payable Management practice questions

Payable Management in other exams

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

Payable Management: frequently asked questions

What is the formula for cost of foregoing cash discount?

It is [Discount % ÷ (100 − Discount %)] × [365 ÷ (Credit period − Discount period)]. Some questions use 360 days, so follow the question. The result is an annualised percentage that you compare with your borrowing cost.

When should a firm take the cash discount?

Take it when the cost of foregoing the discount is higher than the cost of the firm's best alternative source of finance. If the firm has to borrow to pay early, the borrowing rate is the comparison. If the borrowing rate is lower than the cost of foregoing the discount, borrowing to take the discount adds value.

Is stretching payables always a bad idea?

Not always, but it is risky. It reduces working capital needs, yet it can cost you discounts, supplier goodwill and credit standing. The decision should rest on a comparison of costs and on the supplier's reaction.

How is reverse factoring different from normal factoring?

In reverse factoring the buyer sets up the arrangement and the financier pays the supplier early against invoices the buyer has approved. The financier relies on the buyer's credit, so the supplier can often get cheaper finance than it would on its own.

How much time should I give this chapter?

It is one of the shorter chapters of the paper, so a few focused sessions are usually enough. Put most of the time into numerical practice and keep the theory to a concise note you can revise quickly.