- Taking credit from supplier is one way in which a company can obtain some short term finance besides overdrafts, etc
- It is usually considered as a relatively cheap source of finance as suppliers rarely charge interest on amount owed.
- However, trade credit will have a cost (i.e. opportunity cost) as a result of lost in enjoying cash discount offered by supplier to those customer who settle debts within short time frame.
- Hence the management of trade creditors involves:
a) Attempting to obtain satisfactory credit from supplier.
b) Attempting to extend credit during periods of cash shortage.
c) Maintaining good relations with regular and important suppliers.
- Settlement of trade credit will normally in forms of cash, cheques, bills of exchange, acceptance credit.
- As trade credit is a major source of finance, it is particularly important to small and fast growing firms to have such low cost finance. However, such source of finance is only worth undertaking provided its:
> Benefits
a) Reduction in working capital investment.
b) Low cost of short term finance.
c) No need for security.
> Costs
a) Lost of cash discounts.
b) Lost of suppliers goodwill.
Management Of Creditors
