State how you would expect the following events to affect each type of lag:
a. The company imposes a service charge on late payments.
b. A recession causes customers to be short of cash.
c. The company changes its terms from net 10 to net 20.
To assess how the given events might affect each type of lag, we need to understand the different types of lag. There are three types of lag that are commonly referred to in business:
1. Administrative lag: This refers to the time it takes for a company to process orders, prepare invoices, and complete other administrative tasks.
2. Production lag: This refers to the time it takes for a company to manufacture or deliver goods or services after an order has been received.
3. Payment lag: This refers to the time it takes for a company to receive payment from its customers after goods or services have been delivered.
Now, let's examine how each event might affect each type of lag:
a. The company imposes a service charge on late payments.
- Administrative lag: This event would not have a direct impact on administrative lag.
- Production lag: This event would not have a direct impact on production lag.
- Payment lag: Imposing a service charge on late payments may incentivize customers to pay on time or earlier, which could potentially reduce payment lag.
b. A recession causes customers to be short of cash.
- Administrative lag: This event would not have a direct impact on administrative lag.
- Production lag: If customers have reduced cash flow due to a recession, they may delay or reduce their orders, leading to a longer production lag.
- Payment lag: If customers are short of cash, they may delay their payments to the company, resulting in an increased payment lag.
c. The company changes its terms from net 10 to net 20.
- Administrative lag: This event would not have a direct impact on administrative lag.
- Production lag: This event would not have a direct impact on production lag.
- Payment lag: Changing the terms from net 10 to net 20 means that customers will have an additional 10 days to make their payments. This change may potentially increase payment lag.
Overall, it's important to note that the effects on different types of lag will vary based on the specific circumstances of each company and its customers. These potential effects serve as general guidelines, and actual impacts may differ.