Economic Analysis of Extended Payment Terms

Craig Lawrence and Gene Tunny

MPRA Paper from University Library of Munich, Germany

Abstract: In a range of industries, 30 day payment terms are standard. These payment terms follow a calendar cycle and allow for effective financial management and reporting by businesses. Also, the 30 day cycle follows conventional business banking cycles. Employees are typically paid weekly, fortnightly or monthly under employment contracts and industrial legislation. Trade finance, equipment finance and invoice finance is typically paid on 30 day cycles. Some large mining companies specified extended terms of payment to their suppliers several years ago. This was done in the context of a pull back in commodity prices at that time, including the price of metallurgical coal. Commodity prices have recovered significantly and many mining companies are now reporting strong cash flows. However the extended payment term arrangements remain in place in many agreements with suppliers. In addition to this, many small and medium sized firms are experiencing delays in receipt of payment in addition to the extended payment term timeframe. This report looks at the effect of extended payment terms on small and medium sized firms that work with major mining companies in the Mackay region. It considers the cash flow impact on the firms as well as provide an initial estimate of the likely regional economic impact.

Keywords: theory of firm; microeconomics; extended payment terms; cash flow impacts; resource companies; mining sector (search for similar items in EconPapers)
JEL-codes: D22 D23 D24 D43 L11 (search for similar items in EconPapers)
Date: 2018-08-06
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