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CA Intermediate · Financial Management and Strategic Management · Management of Payables (Creditors)

Which of the following is generally an advantage of effective payables management, particularly for a firm that delays payments within the agreed credit period?

Trade credit is a spontaneous and generally cost-free source of short-term finance that rises automatically with purchases. Using the full credit period reduces cash tied up in working capital and shortens the cash conversion cycle, while it does not remove working capital needs.

  1. AIt provides a free, spontaneous source of short-term finance that grows with purchasesCorrect
  2. BIt always improves relationships with suppliers regardless of delay
  3. CIt eliminates the need for any working capital
  4. DIt increases the firm's cash conversion cycle

Explanation

Trade credit is a spontaneous, usually interest-free source of finance that rises with purchase volumes. Stretching payables shortens, not increases, the cash conversion cycle, and it does not remove working capital needs or guarantee goodwill.

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