Cash flow and trade credit - putting the squeeze on suppliers

An interesting article here in the Telegraph which highlights the problem of late-payment of supplier invoices as firms look to find ways of improving their cash flows. Businesses of all types use trade credit as a key source of short-term finance - it is perfectly acceptable and a normal part of doing business. What is less acceptable (from an ethical point of view) is deliberately stretching the time taken to settle amounts owed to suppliers, often well beyond the agreed date.

The article explains that, based on the three months to December 2010:

“Large companies turned the screws on suppliers, paying their bills 36.7 days later than agreed terms, up from 35.9 days in the final quarter last year. But small companies recorded the largest increase in their late payments, taking on average more than 22 days to settle invoices – three days longer than the same period last year.”

Why are firms taking longer to pay? A good question for students, who ought to be able to identify some advantages and disadvantages of extending trade credit beyond agreed contractual terms. Is the increase a sing of worsening cash flow problems? Are suppliers not chasing hard enough for payment? Was it the disruption caused by the snow? Many firms may have tried it on by explaining that they had “sent the cheque” but that it was “stuck in the post & snow”.