Justification of sale terms as a way to minimize the cost of trade credit
-
DOIhttp://dx.doi.org/10.21511/imfi.17(3).2020.27
-
Article InfoVolume 17 2020, Issue #3, pp. 360-372
- 761 Views
-
419 Downloads
This work is licensed under a
Creative Commons Attribution 4.0 International License
The individual and implicit nature of the trade credit cost can provoke its increase, and, as a result, violate payment discipline and negative influence on the business price.
This research is dedicated to improving the sale terms definition to minimize the cost of trade credit.
The methods for determining the cost of trade credit of a particular company are proposed to apply, considering the results of the comparative analysis of other enterprises from the same industry.
Based on the example of Ukrainian food processing enterprises, it was revealed that 66% of them for the period 2013–2018 had an aggressive policy, and in 44% of the cases, it was connected with the growing role of trade credit. Minimum (23 days) and average (79 days) days payable outstanding, defined in the industry, were equated, respectively, to discount period and payment delay. Considering and comparing the cost of trade credit with alternative financial resources, the marginal level of the discount was determined. Considering the rate of short-term credit, according to the failed discount method, this level is 2.7% for 2018; toward the effective annual rate method – 2.48%. In the case of the overdraft, the marginal discount is 2.9% and 2.66%, respectively.
When the actual discount is equal or below this level, the buyer attracts trade credit instead of bank loans. Discount higher than marginal, longer discount period, and cheap alternative financing sources provide early payments, positive financial results, and make trade credit free of charge.
- Keywords
-
JEL Classification (Paper profile tab)G21, G32, L66, O16
-
References28
-
Tables10
-
Figures0
-
- Table 1. Variables for the correlation coefficient
- Table 2. The distribution of cases by the type of financing policy
- Table 3. The role of the current liabilities in the formation of the enterprises’ financial resources
- Table 4. The correlation coefficients of the food processing enterprises
- Table 5. The cost of trade credit based on the failed discount
- Table 6. The cost of trade credit in case of the overdraft interest rates
- Table 7. The effective annual rate calculation (in case of the short-term bank loan)
- Table 8. The effective annual rate calculation (in case of the overdraft)
- Table 9. Variants of penalties as a cost of trade credit
- Table 10. The variants of sale terms for 2018
-
- Bărbuţă-Mişu, N. (2018). Analysis of factors influencing managerial decision to use trade credit in construction sector. Economic Research-Ekonomska Istraživanja, 31(1), 1903-1922.
- Białek-Jaworska, A., & Nehrebecka, N. (2016). The role of trade credit in business operations.
- Block, S. B., & Hirt, G. A. (1989). Foundations of Financial Management (733 p.). Homewood, Illinois: Irwin.
- Boissay, F., Patel, N., & Hyun Song Shin. (2020). Trade credit, trade finance, and the Covid-19 Crisis. BIS Bulletin, 24.
- Brealey, R. A., Myers, S. C., & Marcus, A. J. (1995). Fundamentals of Corporate Finance (671 p.). New York: McGraw-Hill, Inc.
- Canto-Cuevas, F.-J., Palacín-Sánchez, M.-J., & Di Pietro, F. (2019). Trade Credit as a Sustainable Resource during an SME’s Life Cycle. Sustainability, 11(3), 670.
- Cuñat, V., & Garcia‐Appendini E. (2012). Trade credit and its role in entrepreneurial finance. In Oxford Handbook of Entrepreneurial Finance (pp. 526‐557). New York: Oxford University Press.
- Damodaran, A. (2020). Current data.
- Damodaran, A. (2020). Variables Used in Data Set.
- Garcia-Marin, A., Justel, S., & Schmidt-Eisenlohr, T. (2019). Trade Credit and Markups (CESifo Working Paper No. 7600).
- Huang, Li, Ying, Q., Yang, S., & Hassan, H. (2019). Trade Credit Financing and Sustainable Growth of Firms: Empirical Evidence from China. Sustainability, 11(4), 1032.
- KPMG. (2020). Cost of capital study 2019.
- McGuiness, G., & Hogan, T. (2014). Bank credit and trade credit: Evidence from SMEs over the financial crisis. International Small Business Journal, 1-34.
- Ministry of Finance of Ukraine. (2013). Natsionalne polozhennia (standart) bukhhalterskoho obliku 1 “Zahalni vymohy do finansovoj zvitnosti” [National Accounting Standard 1 “General requirements for financial reporting”]. (In Ukrainian).
- National Bank of Ukraine. (2013–2018). Dani statystyky finansovoho sektoru [Financial sector statistics]. (In Ukrainian).
- Rahman, A., Rozsa, Z., & Cepel, M. (2018). Trade Credit and Bank Finance – Evidence from the Visegrad Group. Journal of Competitiveness, 10(3), 132-148.
- Ross, S. A., Westerfield, R. W., & Jordan, B. D. (2013). Fundamentals of Corporate Finance (824 p.). New York: McGraw-Hill/Irwin.
- State Statistics Service of Ukraine. (2013–2017). Pokaznyky balansu pidpryiemstv [Balance Sheet Indicators of Enterprises]. (In Ukrainian).
- Stock Market Infrastructure Development Agency of Ukraine. (2013–2018). Richna finansova zvitnist emitentiv [Annual financial reports of issuers]. (In Ukrainian).
- Stock Market Infrastructure Development Agency of Ukraine. (2013–2017). Richna finansova zvitnist ZAT “Odesakondyter” [Annual financial reports of Private Joint-Stock Company “Odesakondyter”]. (In Ukrainian).
- Stock Market Infrastructure Development Agency of Ukraine. (2013–2018). Richna finansova zvitnist PAT “Rivnenska kondyterska fabryka” [Annual financial reports of Public Joint-Stock Company “Rivne confectionery factory”]. (In Ukrainian).
- Stock Market Infrastructure Development Agency of Ukraine. (2013–2018). Richna finansova zvitnist PRAT “Kondyterska fabryka “Kharkivianka” [Annual financial reports of Private Joint-Stock Company “Confectionery factory “Kharkivianka”]. (In Ukrainian).
- Stock Market Infrastructure Development Agency of Ukraine. (2013–2018). Richna finansova zvitnist PRAT “Kremenchutska kondyterska fabryka “Roshen” [Annual financial reports of Private Joint-Stock Company “Kremenchuh confectionery factory “Roshen”]. (In Ukrainian).
- Stock Market Infrastructure Development Agency of Ukraine. (2013–2018). Richna finansova zvitnist PRAT “Kyivska kondyterska fabryka “Roshen” [Annual financial reports of Private Joint-Stock Company “Kyiv confectionery factory “Roshen”]. (In Ukrainian).
- Stock Market Infrastructure Development Agency of Ukraine. (2013–2018). Richna finansova zvitnist PRAT “Vinnytska kondyterska fabryka” [Annual financial reports of Private Joint-Stock Company “Vinnytsia confectionery factory”]. (In Ukrainian).
- The Verkhovna Rada of Ukraine. (1996). Zakon Ukrajny “Pro vidpovidalnist za nesvoiechasne vykonannia hroshovykh zoboviazan” [Law of Ukraine “On Responsibility for Untimely Fulfillment of Monetary Obligations”]. (In Ukrainian).
- The Verkhovna Rada of Ukraine. (2003). Tsyvilnyi Kodeks Ukrainy [Civil Code of Ukraine]. (In Ukrainian).
- Winkler, D. T. (1996). The Cost of Trade Credit: A Net Present Value Perspective. Journal of Business and Economic Studies, 3(1), 53-63.