## Management of Payables (Creditors)
### Introduction
- "If you can buy well, you can sell well."
- Creditor management is as important as debtor management.
- Trade credit is a spontaneous short-term source of finance — it arises automatically from ordinary business transactions.
- Poor payables management can damage supplier relationships, disrupt supplies, and harm the firm's credit reputation.
- Creditors are a vital part of effective cash management.
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## Cost of Availing Trade Credit
Trade credit is not truly "free" — it carries hidden and explicit costs:
| Cost | Explanation |
|---|---|
| Loss of Cash Discount | Discount is available only for early/immediate payment. Using trade credit means forgoing the discount — this is an implicit cost. |
| Loss of Goodwill | Overstepping credit terms leads suppliers to discriminate against the firm or tighten terms. Effect depends on relative market strengths. |
| Administrative Cost | Managing creditors involves accounting, tracking, and administrative overhead. |
| Supplier Conditions | Suppliers may require minimum order sizes or regular ordering as a precondition for granting credit. |
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## Cost of NOT Availing Trade Credit
| Cost | Explanation |
|---|---|
| Inflation Effect | In inflationary periods, paying later is advantageous (fixed rupee amount loses real value). Not availing credit means paying sooner at a real disadvantage. |
| Interest Cost | Trade credit is effectively an interest-free loan. Rejecting it means sourcing alternative funds that carry an explicit interest cost. |
| Supplier Inconvenience | Suppliers geared for deferred payment may find immediate payment disruptive to their own cash flow planning. |
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## Key Principle
There is a cost on both sides: availing credit has implicit costs (lost discounts, goodwill risk) and not availing it has explicit costs (interest, lost inflation benefit). The finance manager must balance these to optimise the payables strategy.