Effects of Late or Non-payments/Administrative
|Unit 3.3- Effects of Late or Non-payments||
Introduction | Tenets of Risk Assessment | Risk and Reward | "Eight C's" | 5 "C's" | 3 "C's" | Applying the "C's" | Impact of Nonpayment | Identifying Costs | Bad Debt Value | Interest | Cost and Capital | Administrative | Summary | Resources | Activities | Assessment
There are several examples of administrative costs.
Losing the ability to discount
For example, if a seller sold to a buyer who was slow to pay, this seller’s cash flow is impacted. Assume this seller has purchased products and services from vendors as part of the business. These vendors may offer a 1% discount to the seller if paid in 10 days. If the buyer had paid on time, the seller could have paid the vendor in 10 days and therefore saved 1%. This is an example of the seller losing the ability to "take" the 1% discount offered by the vendor.
Another discount example may include a transaction with a bank. Assume a seller has the option to prepay his loan with a bank. In return, the bank will discount the fees due the bank. Just as in the other example, if a buyer does not pay on time this seller might not have the money to prepay the loan and receive a discount. This seller has lost the opportunity to save costs associated with the loan. This is a crucial cost, especially in a high-interest period.
Paying penalty/late charges
In this situation, instead of missing out on a discount for not being able to pay earlier, a seller has to pay a penalty for being late. If this seller does not receive payment promptly from the buyer, this seller’s cash flow may be impacted; thus, there is the potential that suppliers will be paid (obligations) late and therefore incur charges. Another impact associated with late penalties is the possibility of restricted credit in the future.
Increasing risk factors
Uncollected debt is a cost to a business. The older the debt, the harder to collect.
Maintaining administrative, bookkeeping functions
Uncollected debt costs not only include the cost of the product sold and the lost profit but they also mean administrative costs ( letters, bill chasers, etc) that a seller might use to try and recoup some of the initial cost associated with the product. In other words, another impact of nonpayment is the need to chase the reluctant debtor.