The lag between purchase date and the date at which payment is due is known as the "terms lag". The lag between the due date and the date on which the buyer actually pays is termed the "due lag", and the lag between the purchase and actual payment dates is the "pay lag".
Thus Pay lag=terms lag + due lag
State how you would expect the following events to affect each type of lag:
a)The company imposes a service charge on late payers.
b)A recession causes customers to be short of cash.
c)The company changes its terms from net 10 to net 20.
a. Due lag and pay lag fall.
b. Due lag and pay lag increase.
c. Terms lag and pay lag increase.
To analyze how the given events affect each type of lag (terms lag, due lag, and pay lag), we can consider the following:
a) The company imposes a service charge on late payers:
This event is likely to influence the due lag and pay lag. When a service charge is imposed on late payers, it creates a financial consequence for delaying payments. As a result, customers may be motivated to pay their bills on time to avoid the additional charges. This would potentially reduce the due lag, as customers make efforts to pay within the specified time frame. Consequently, the pay lag may also decrease because customers are more prompt in submitting their payments to avoid incurring the extra fee.
b) A recession causes customers to be short of cash:
During a recession, customers may experience financial difficulties, leading to a shortage of available cash. This situation can have an impact on all three types of lags. Firstly, the terms lag may increase if customers delay making purchases altogether, resulting in a longer period before a purchase is made. Secondly, the due lag may extend as customers struggle to gather the necessary funds to fulfill their payment obligations. Lastly, the pay lag could also be prolonged since customers may be unable to pay their bills on time due to financial constraints caused by the recession.
c) The company changes its terms from net 10 to net 20:
When the company changes its terms from net 10 to net 20, it refers to the number of days within which payment is due. This change primarily affects the terms lag and subsequently influences the pay lag. By increasing the payment terms from net 10 to net 20, the company allows customers more time to make their payments. Consequently, this change can result in a longer terms lag since the time between purchase and when payment is due has been extended. As a result, the pay lag may also increase as customers have a longer period between purchase and actual payment dates.
In summary, the imposition of a service charge on late payers is likely to decrease both the due lag and the pay lag. On the other hand, a recession causing customers to be short of cash is expected to increase all three types of lags. Lastly, changing the terms from net 10 to net 20 would lead to an increase in the terms lag and potentially result in a higher pay lag.