Finman

Spontaneous liabilities arise from the normal course of business. The two major spontaneous sources of short-term financing are accounts payable and accruals. As the firm’s sales increase, accounts payable increase in response to the increased purchases necessary to produce at higher levels. Also in response to increasing sales, the firm’s accruals increase as wages and taxes rise because of greater labor requirements and the increased taxes on the firm’s increased earnings. There is normally no explicit cost attached to either of these current liabilities, although they do have certain implicit costs. In addition, both are forms of unsecured short-term financing—short-term financing obtained without pledging specific assets as collateral. The firm should take advantage of these “interest free” sources of unsecured short-term financing whenever possible.
Accounts Payable Management
Accounts payable are the major source of unsecured short-term financing for business firms. They result from transactions in which merchandise is purchased but no formal note is signed to show the purchaser’s liability to the seller. The purchaser in effect agrees to pay the supplier the amount required in accordance with credit terms normally stated on the supplier’s invoice. The discussion of accounts payable here is presented from the viewpoint of the purchaser.
Role in the Cash Conversion Cycle
The average payment period is the final component of the cash conversion cycle introduced in Chapter 14. The average payment period has two parts: (1) the time from the purchase of raw materials until the firm mails the payment and (2) payment float time (the time it takes after the firm mails its payment until the supplier has withdrawn spendable funds from the firm’s account). In the preceding chapter, we discussed issues related to payment float time. Here we discuss the management by the firm of the time that elapses between its purchase of raw materials and its mailing payment to the