Forecasting Payments. 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?
To determine the fraction of purchases that will be paid for in a specific quarter, we need to consider the payment delay period. The payment delay refers to the number of days it takes for a firm to pay its bills after making a purchase.
For the current quarter:
1. Determine the total number of days in the current quarter. Let's assume the current quarter has 90 days.
2. Subtract the payment delay period from the total number of days in the current quarter. This will give us the number of days the firm's purchases from the current quarter will be paid for.
- Example: If the payment delay period is 30 days, subtract 30 from 90 to get 60.
3. Divide the result from step 2 by the total number of days in the quarter to find the fraction of purchases paid for in the current quarter.
- Example: If 60 days from step 2 and the total number of days in the current quarter is 90, divide 60 by 90 to get 2/3 or approximately 0.67.
For the following quarter:
1. Determine the total number of days in the following quarter. Let's assume the following quarter also has 90 days.
2. Subtract the payment delay period from the total number of days in the following quarter. This will give us the number of days the firm's purchases from the current quarter will be paid for in the following quarter.
- Example: If the payment delay period is 30 days, subtract 30 from 90 to get 60.
3. Divide the result from step 2 by the total number of days in the quarter to find the fraction of purchases paid for in the following quarter.
- Example: If 60 days from step 2 and the total number of days in the following quarter is 90, divide 60 by 90 to get 2/3 or approximately 0.67.
Now, let's consider the case when the payment delay is 60 days instead of 30 days:
For the current quarter:
1. Following the same steps as before, subtract 60 from 90 to get 30.
2. Divide 30 by 90 to get 1/3 or approximately 0.33.
For the following quarter:
1. Subtract 60 from 90 to get 30.
2. Divide 30 by 90 to get 1/3 or approximately 0.33.
In summary:
If the payment delay is 30 days:
- Fraction of purchases paid for in the current quarter: 2/3 or approximately 0.67.
- Fraction of purchases paid for in the following quarter: 2/3 or approximately 0.67.
If the payment delay is 60 days:
- Fraction of purchases paid for in the current quarter: 1/3 or approximately 0.33.
- Fraction of purchases paid for in the following quarter: 1/3 or approximately 0.33.