Economic Analysis of Extended Payment Terms

Lawrence, Craig and Tunny, Gene (2018): Economic Analysis of Extended Payment Terms.

Abstract

In a range of industries, 30 day payment terms are standard. These payment terms follow a calendar cycle and allow for effective financial management and reporting by businesses. Also, the 30 day cycle follows conventional business banking cycles. Employees are typically paid weekly, fortnightly or monthly under employment contracts and industrial legislation. Trade finance, equipment finance and invoice finance is typically paid on 30 day cycles. Some large mining companies specified extended terms of payment to their suppliers several years ago. This was done in the context of a pull back in commodity prices at that time, including the price of metallurgical coal. Commodity prices have recovered significantly and many mining companies are now reporting strong cash flows. However the extended payment term arrangements remain in place in many agreements with suppliers. In addition to this, many small and medium sized firms are experiencing delays in receipt of payment in addition to the extended payment term timeframe. This report looks at the effect of extended payment terms on small and medium sized firms that work with major mining companies in the Mackay region. It considers the cash flow impact on the firms as well as provide an initial estimate of the likely regional economic impact.

• Item Type: MPRA Paper
• Language: English
• Keywords: theory of firm, microeconomics, extended payment terms, cash flow impacts, resource companies, mining sector
• Subjects: D - Microeconomics > D2 - Production and Organizations > D22 - Firm Behavior: Empirical Analysis; D - Microeconomics > D2 - Production and Organizations > D23 - Organizational Behavior ; Transaction Costs ; Property Rights; D - Microeconomics > D2 - Production and Organizations > D24 - Production ; Cost ; Capital ; Capital, Total Factor, and Multifactor Productivity ; Capacity; D - Microeconomics > D4 - Market Structure, Pricing, and Design > D43 - Oligopoly and Other Forms of Market Imperfection; L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance > L11 - Production, Pricing, and Market Structure ; Size Distribution of Firms

References

Barrot, J. and Nanda, R. (2016) “Can paying firms quicker affect aggregate employment?”, NBER Working Paper, no. 22420.

Gretton, P. (2013) “On input-output tables: Uses and abuses”, Productivity Commission Staff Research Note.

Hume, N. (2018) “Big miners loosen purse strings as cost-cuts pay off”, Financial Times, 27 June 2018.

Queensland Department of Natural Resources and Mines (2017) Coal Industry Review Tables 2016-17.

Salt, B. (2018) ‘Let’s start a revolution’ in The Weekend Australian Magazine, 25 February 2018

Simpson, J. (2016) ‘Extended payment terms: who really pays the price?’ in Contracting Excellence Journal, International Association for Contract and Commercial Management, https://journal.iaccm.com/contracting-excellence-journal/cash-flow-problems-no-worries- squeeze-your-supplier

Simpson, J. (2018) ‘Extended payment terms: Good news for global firms!’ in Contracting Excellence Journal, International Association for Contract and Commercial Management, https://journal.iaccm.com/contracting-excellence-journal/-extended-payment-terms-good- news-for-global-firms