If a firm pays its bills with a 30-day delay, what fraction of its purchases will be paid for in the current quarter? In the following quarter? What if its payment delay is 60 days?
Think it through...
If a quarter has approximately 90 days and purchases in 30 of those days, the payment will be in the following quarter, and for purchase in 60 of those 90 days, the payment will be made in the current quarter.... means?
To determine the fractions of purchases that will be paid for in the current quarter and the following quarter, we need to consider the payment delay period.
If a firm pays its bills with a 30-day delay:
- Current quarter: Purchases made in the current quarter will be paid for in the next quarter since there is a 30-day delay. Therefore, none of the purchases in the current quarter will be paid for in the current quarter.
- Following quarter: Purchases made in the previous quarter will be paid for in the following quarter. So, all of the purchases made in the previous quarter will be paid for in the following quarter.
If a firm pays its bills with a 60-day delay:
- Current quarter: Purchases made in the current quarter will still be paid for in the next quarter since there is a 60-day delay. Therefore, none of the purchases in the current quarter will be paid for in the current quarter.
- Following quarter: Purchases made two quarters ago will be paid for in the following quarter. So, all of the purchases made two quarters ago will be paid for in the following quarter.
In summary:
- For a firm with a 30-day payment delay, none of the purchases in the current quarter will be paid for in the current quarter, while all of the purchases from the previous quarter will be paid for in the following quarter.
- For a firm with a 60-day payment delay, none of the purchases in the current quarter will be paid for in the current quarter, while all of the purchases made two quarters ago will be paid for in the following quarter.