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Simply put, assuming the books will balance eventually, would you rather hold the money or hold the IOU, and for how long? If you hold the money as it changes h
by nick3443 2y ago
Simply put, assuming the books will balance eventually, would you rather hold the money or hold the IOU, and for how long? If you hold the money as it changes hand, you can make money off of that (or use it for opening the next store).
For a corporation where revenues are consistent, 90 days of payables that you haven't paid anybody yet could be equivalent to tens or hundreds of millions of interest-free loans.
Home depot notoriously has payment terms that can extend beyond one year.
Edit:
To add on to that, understanding the accounting of E,I,T,D, & A (earnings, interest, taxes, depreciation, amortization) as in EBITDA is an important factor to grokking beyond the surface of the article. Basically cash accounting versus amortization accounting.
- SoftTalker 2y ago> 90 days of payables that you haven't paid anybody yet could be equivalent to tens or hundreds of millions of interest-free loans ... for the first 90 days, it seems to me. Then you're back to paying them, they're only time shifted. So it strikes me as a way to take a 90 day loan, once. What am I missing?
- catherd 2y agoIt's a forever loan for whatever your average payables total to over 90 days (so $10k every month would be a $30k loan). The loan lasts forever or until you close out that line of credit/wind up the company.
- nick3443 2y agoThe loan lasts as long as your payables continue to average above $10k/month (or 30k in every rolling 3mo period). Businesses get into trouble when they have a short term disruption and suddenly their cash flow is impacted, then they have no more receivables and have to quickly come up with money to close out the payables. If they are already over leveraged or don't have creditworthiness then they can become insolvent.
- bluGill 2y agoTake out a 90 day loan for 10k and invest in something, the 30 days latter take out another, the 30 dayn latter pay off the first with results of the first investment while taking out another loan. You never make money but you pay all the bills along the way and slowly build up some hard assets that are paid for.