A firm tries to extend its disbursement float in order to reduce its working capital needs. Which of the following is a risk that may be associated with this strategy, if it is taken too far?
A) may attract a late fee
B) may be required to pay before delivery for future supplies
C) may jeopardize the entire relationship with the supplier
D) all of the above

Question

Quizplus · Accepted Answer

If a firm tries to extend its disbursement float to reduce its working capital needs, there are several risks associated with this strategy. It may attract a late fee if the company delays payment beyond the due date, which could affect the credit rating and increase the cost of capital. The supplier may refuse to extend credit terms in the future and may require the firm to pay before delivery for future supplies, which could limit the firm's ability to manage its cash flows. Additionally, too much delay in payments may damage the trust and the entire relationship with the supplier, which could affect the firm's reputation and ability to procure necessary goods or services. Therefore, all of the above options are valid risks associated with extending the disbursement float, especially if taken too far.

A Firm Tries to Extend Its Disbursement Float in Order