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.
1. C. The company changes its terms from net 10 to net 20.
To understand how these events can affect each type of lag, let me first explain the different types of lag in a business context.
1. Administrative Lag: This refers to the time it takes for a company to process its internal operations, such as preparing invoices, managing paperwork, and other administrative tasks.
2. Inventory Lag: This lag represents the time it takes for a company to receive and stock inventory. It includes the time from placing an order to the point when the inventory is ready for sale.
3. Production Lag: Production lag is the time it takes for a company to convert raw materials or inputs into finished products ready for sale.
Now, let's examine how each event can potentially impact these types of lag:
a. The company imposes a service charge on late payers: This event may influence administrative and inventory lag. When a company imposes a service charge on late payers, it can act as an incentive for customers to make their payments on time, thereby reducing administrative lag associated with chasing after late payments. Additionally, if customers are deterred by the service charge, the company's inventory lag may decrease since it can result in a decrease in orders placed by customers.
b. A recession causes customers to be short of cash: This event can affect all three types of lag. During a recession, customers may have limited financial resources, leading to delays in payment. This can increase administrative lag as companies need to spend more time following up and collecting payments. Furthermore, reduced customer demand may result in a decrease in inventory levels and order quantities, thereby affecting inventory and production lag.
c. The company changes its terms from net 10 to net 20: This event primarily affects administrative lag. When a company extends its payment terms, such as changing from net 10 (payment due in 10 days) to net 20 (payment due in 20 days), it can increase administrative lag since customers have more time to make payments. This means that the accounts receivable aging process will be longer and may require more efforts to manage and collect payments.
It is important to note that the impact of these events on lag can vary depending on various factors such as industry, customer behavior, and company-specific circumstances. These explanations provide a general understanding of how these events might affect lag in a business context.