Managing Receivables, Inventory, Payables, and Short-Term Borrowing

Book: Corporate Finance: A Practical Approach (2nd ed.)
Authors: Michelle R. Clayman, Martin S. Fridson, George H. Troughton
ISBN: 978-1-118-10537-5

The second half of Chapter 8 walks through the three big working capital accounts (receivables, inventory, payables) and closes with how to borrow short-term without overpaying. This is the operational layer on top of the liquidity framework from Part 1.

Accounts receivable: credit, collections, and measurement

AR management sits between credit, treasury, and accounting. Slow recording of payments delays deposits and can block repeat sales.

Goals: accurate records fast, tight control, timely collection, regular performance reports (aging schedules, days sales outstanding).

Large companies sometimes use captive finance subsidiaries to fund customer sales and manage seasonal receivables with different debt terms than the parent. Outsourcing and credit insurance are also common tools.

Credit policy sets who gets credit and on what terms. Common structures: open book (B2B), documentary (cross-border), installment, revolving. Terms range from net 60 to 1/10 net 30 (1% discount for paying within 10 days). Credit scoring weighs checking balances, entity type, and payment history. Late pay, personal bankruptcy, and high-risk industries like food service get penalized.

Collections infrastructure:

• Retail: local deposits, concentration
• B2B: lockbox services (checks mailed to a bank PO box, deposited same day, funds available next business day)
• Electronic: ACH, wire, POS systems, direct debit for utilities and subscriptions

Float factor = Average daily float / Average daily deposits. Measures how long deposited checks take to clear. Under 1.0 may justify same-day wires from remote depository banks.

Best practice: accelerate electronic collection where possible. Lockbox is second best. Concentrate via EFT debits from lockbox banks to the lead bank overnight.

Aging schedules break receivables into 0-30, 31-60, 61-90, 90+ day buckets. A shift toward older buckets (like April vs. March in the book’s example) warrants investigation. Extended terms? Customer stress?

Weighted average collection period uses the age distribution for a sharper picture than simple days of receivables alone.

Inventory: enough, not too much

Inventory is cash frozen in physical form. Excess inventory risks obsolescence and overstates balance sheet value. Shortages mean lost sales.

Motives mirror cash motives:

• Transactions: routine production/sales cycle
• Precautionary: safety stock against stock-outs
• Speculative: buying ahead of known price increases (publisher stocking paper before a price hike)

Overinvestment ties up cash, wastes warehouse space, invites shrinkage and spoilage, and can hurt pricing competitiveness. Underinvestment loses customers and forces expensive emergency production runs.

EOQ-ROP minimizes ordering plus carrying costs and works best with reliable forecasts. JIT brings materials only as needed. MRP adds production scheduling. Dell’s negative operating cycle came from starting production only after customer payment. Inventory costs include ordering, carrying, stock-out, and administration.

Evaluation: inventory turnover and days of inventory, compared to industry norms. Food manufacturing turns faster than apparel. Wal-Mart’s 7.5x turnover vs. Target’s 5.7x partly reflects grocery mix. A turnover drop could mean excess inventory or a deliberate product mix shift toward slower-moving goods.

Accounts payable: trade credit as free (or costly) financing

Payables arise from trade credit: you get goods now, pay later. Terms like 2/10, net 30 offer a 2% discount for early payment.

The purchasing-inventory-payables chain must be linked. Bad coordination traps cash in the pipeline.

Paying too early wastes the float. Paying too late damages supplier relationships and future credit terms. Stretching payables beyond the due date frees cash temporarily. Value of stretching 7 extra days on $100,000 at 8% annual cost ≈ $153. But suppliers may retaliate with tighter terms. Some consider late payment unethical.

Trade discount math: the cost of skipping a discount is steep near the discount deadline and falls as you approach the net due date.

For 2/10, net 30, paying on day 20 costs about 109% annualized. Paying on day 30 costs about 44.6%. If your short-term borrowing rate is below the implicit rate, take the discount by paying early.

Disbursement best practices: controlled disbursement (fund checks only when they clear), positive pay (fraud filter), electronic payments when cheaper than check float.

Days of payables = 365 / (Purchases / Average payables). Compare to stated terms. Treasurers sometimes track payables days against inventory days in industries where the two should align.

Short-term financing: sources and true cost

A short-term policy should cover investments, borrowing, FX, and risk for all subsidiaries. Too many companies only ask “can we borrow?” instead of “what is the cheapest way to borrow?”

Bank sources range from uncommitted lines (cheap but unreliable) to committed 364-day lines (prime or LIBOR plus spread, with commitment fees) to multi-year revolvers (strongest, often syndicated). Nonbank options include commercial paper and banker’s acceptances for larger credits.

Weaker borrowers use asset-based loans secured by receivables or inventory, or factor receivables outright. Active borrowing strategies match maturities to expected cash receipts and diversify across lenders.

Computing comparable cost:

Line of credit: (Interest + Fees) / Net proceeds received

All-inclusive (banker’s acceptance): Interest / (Face − Interest)

Add dealer fees, backup line costs, commitment fees, compensating balances. Annualize for sub-year loans.

Example: borrow $5 million for one month.

• Line at 6.5% + 0.5% commitment fee on full line → 7.00% effective
• Banker’s acceptance at 6.75% all-in → 6.79%
• Commercial paper at 6.15% + 0.125% dealer + 0.25% backup → 6.56%

Commercial paper wins on cost. The commitment fee on the unused line is what kills the line-of-credit option.

Chapter takeaway

Working capital management is not a side task. Short-term decisions echo into long-term financing and investment choices. The chapter’s through-line: measure liquidity and cycles, forecast cash honestly, collect fast, hold lean inventory, pay strategically, invest safely, and borrow with eyes open on true cost.

My take: The trade discount formula alone is worth the chapter. Most people see “2/10 net 30” and ignore it. That is leaving money on the table or paying triple-digit annualized rates for a few weeks of float without realizing it. The short-term borrowing comparison is the other gem. Headline rates lie. Commitment fees, backup lines, and discount structures change the ranking. If your treasury team is not annualizing everything to a common basis, you are probably overpaying somewhere.

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