Impact of Extending Payment Terms on Working Capital Management

Very Hard Working Capital Management Accounts Payable Management

A company, XYZ Corp., has been managing its accounts payable quite conservatively to maintain good relationships with its suppliers. Recently, the finance department analyzed the company's accounts payable turnover ratio and noted that it has remained significantly higher than the industry average. This has led to capital being tied up and potentially impacting liquidity and the company's overall financial health.

The CFO is contemplating extending the payment terms to suppliers in order to improve working capital without negatively impacting supplier relationships. This leads to a strategic question regarding the management of accounts payable.

Which of the following options best describes the potential impact of extending the payment terms on XYZ Corp.'s working capital management strategy?

Extending payment terms will improve liquidity but may lead to strained relationships with suppliers.

Extending payment terms will reduce the accounts payable turnover ratio and enhance liquidity without affecting supplier relationships.

Extending payment terms will increase both liquidity and the accounts payable turnover ratio, potentially leading to better financial health.

Hint

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