CIMA F1 Syllabus D. Management Of Working Capital And Cash - Offering credit facilities to customers - Notes 2 / 12
The benefits and costs
Today, very few businesses expect to be paid immediately in cash.
Most businesses buy and sell to one another on credit terms.
A business will allow credit terms to customers and receive credit terms from its suppliers.
This provides the benefit of allowing businesses to keep trading without having to provide cash 'up front'.
However, providing credit facilities to customers can lead to problems.
Customers might fail to pay, either out of dishonesty or because they have gone bankrupt.
Therefore, the costs of offering credit facilities to customers can include:
Interest costs of an overdraft, if customers do not pay promptly.
Costs of trying to obtain payment, e.g. chasing customers by phone
Court costs, e.g. the costs of legal letters
If an entity fails to pay its suppliers by the normal due dates, it may lead to:
Reduction in credit rating
Therefore, difficulty in obtaining credit from new suppliers