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Economic Analysis of Extended Payment Terms

Author

Listed:
  • Lawrence, Craig
  • Tunny, Gene

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.

Suggested Citation

  • Lawrence, Craig & Tunny, Gene, 2018. "Economic Analysis of Extended Payment Terms," MPRA Paper 107124, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:107124
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    File URL: https://mpra.ub.uni-muenchen.de/107124/1/MPRA_paper_107124.pdf
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    References listed on IDEAS

    as
    1. Jean-Noel Barrot & Ramana Nanda, 2016. "Can Paying Firms Quicker Affect Aggregate Employment?," NBER Working Papers 22420, National Bureau of Economic Research, Inc.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    theory of firm; microeconomics; extended payment terms; cash flow impacts; resource companies; mining sector;
    All these keywords.

    JEL classification:

    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

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