Discussion: Pay Terms Debate (Initial Post)

1.4 Discussion: Pay Terms Debate (Initial Post)

Getting Started

To stay in business, a company must manage its cash. Cash is the financial lifeblood of any organization. Cash will inevitably flow in and out of the organization, and understanding where cash comes from and where it goes is important. Poor cash flow is the quickest path to bankruptcy, while strong cash flow can be a significant competitive advantage. Therefore, all of a company’s stakeholders are interested in its cash flow. 

Upon successful completion of this discussion, you will be able to:

  • Evaluate the ethical and financial implications of real-world payment practices.

Resources

  • Textbook: Analysis for Financial Management
  • Textbook: Principles of Accounting: Volume 1, Financial Accounting
  • Website: Connect
  • File: Higgins Chapter 1 Slides
  • File: Financial Accounting Chapter 1
  • File: Financial Accounting Chapter 2
  • Video: Cash Flow and Working Capital

Background Information

In this assignment, you will learn more about cash, which is the most liquid asset of any organization, business, or individual. The concept of cash in itself is not complicated. However, keep in mind a company can be very good at producing accounting profits but poor at generating or managing cash effectively. For example, if a company sells its product by allowing credit but fails to collect payment from its customers, the revenue claimed is ultimately null and void. Simply put, a business that fails to generate cash through its operations will not be able to pay its bills. Investors and creditors will take note and stop providing funding, intensifying the problem.

As a customer, businesses must closely manage their cash flow with their suppliers. Accounts payable, the money owed to suppliers, can be a valuable source of cash. When a company lengthens its pay terms with its suppliers, it is equivalent to taking out a short-term loan. By withholding payments, the company will have more cash on hand, and accounts payable will increase. This cash is then available to fund the company’s project and product ideas. However, this same action has the reverse effect on a supplier. Longer pay terms means the supplier will have less cash on hand, its accounts receivable will increase, and it will have less funding to pursue its own projects.

Many a small business has died after their bank becomes concerned about operating cash flows and calls in their credit line. Even large, stable businesses must carefully manage their cash to ensure sufficient liquid resources to pay wages, cover expenses, and fund their projects. The discussion in this assignment revolves around the risks associated with managing cash and the implications of a company’s pay term decisions. 

Instructions

  1. Review the rubric to make sure you understand the criteria for earning your grade.
  2. In your textbook, Analysis for Financial Management, read Chapter 1, “Interpreting Financial Statements,” paying particular attention to the review of the cash flow cycle at the beginning of the chapter.
  3. In your textbook, Principles of Accounting, read Chapters 1 and 2, “Role of Accounting in Society” and “Introduction to Financial Statements.”
  4. Review the Financial Accounting Chapter 1 and Financial Accounting Chapter 2 PowerPoints to help you further understand the chapter concepts.
  5. Review Higgins Chapter 1 Slides.
  6. Watch the video “Cash Flow and Working Capital
  7. Respond to the following prompts:
    1. From the customer’s perspective, what are the financial implications of lengthening supplier pay terms? What are the financial implications from a supplier’s perspective?
    2. What are the ethical implications of lengthening supplier pay terms? Is this a legitimate business strategy? Why or why not?
    3. Support your position with at least one biblical principle with a specific Bible verse that you feel is relevant to the situation. Explain how and why it applies.
  8. Your post should be based on the chapters, as well as other resources that can contribute to the discussion. Use OCLS to search for relevant scholarly sources you can use to support your position.
  9. This initial post should be 200–400 words in length and include at least one academic source that is properly cited. Use APA format and include a reference list. Your post is due by the end of the workshop.
    1. For questions on APA style, go to OCLS APA Writing Styles Guides.
  10. A single post asserting your position is all that is required for this assignment. However, be prepared to defend your position in the following workshop. 
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