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Understanding the Concept of Purchasing on Account
Purchasing on account is a common business practice where buyers receive goods or services from suppliers without making payment immediately. Instead, they receive credit; that is, they agree to pay for the goods or services after a certain period of time, usually 30 to 90 days. This is a useful approach in the management of the cash flow and it provides the company with the necessary flexibility in the expenditure of funds.
However, there are risks that are affiliated with purchasing on account that the buyers should be aware of before getting into such agreements. In this article, we are going to discuss both the advantages and disadvantages of purchasing on account so that you can make the right decision for your business.
Why It’s Beneficial to Purchase on Account: The Convenience, the Flexibility, and the Positive Impact on Cash Flow
The main advantage of purchasing on account is the degree of convenience it brings. Since businesses do not have to pay for the goods or services they receive right away, there is no need for the business to keep a close eye on its cash balances. This way, the company does not have to worry about the day-to-day running of the business while also not having to worry about running out of cash.
The flexibility is another major advantage. When companies choose to pay by credit terms rather than pay cash, it gives them more freedom in paying off their debts at different times. This is especially useful in the case of seasonality since the company can spread its payments over the months rather than make a single large payment during the peak selling season when other expenses are also high.
Another particular advantage is the possibility to improve the cash flow management. Purchasing on account assists the companies to have a better control of the monthly expenses while still meeting the required levels of inventory for production especially during peak periods.
Furthermore, it is still possible to get discounts or other benefits from suppliers if the buyer is a large company or if the buyer is willing to pay by credit, as long as it is done properly based on the expected cash flows.
Some of the Disadvantages of Purchasing on Account: Overextension of Credit, Late Payment, and Interest Rates
It is therefore possible to have several advantages of purchasing on account, however there are some disadvantages as well. The biggest fear is probably overextension of credit. This is because if companies do not plan or budget properly, they may end up spending more than they can comfortably repay within the agreed time. This may cause them to experience financial constraints in the event that payment is made late, or where interest charges are incurred as a result of late payment.
Another concern is that of late payments. Suppliers may demand more money from the buyer if the balance is not paid on time, and it keeps on accumulating if you have a high-interest rate from the lenders who are financing you.
Interest rates can also grow very rapidly for the buyer who does not make the payment on time. It is also important to note that suppliers may charge less for the cash than for the credit purchase. This is an important factor to consider while comparing the costs and benefits of the project in the long run.
Conclusion: Let’s Look at the Positives and the Negatives in Order to Decide Whether to Purchase on Account or Not
In conclusion, purchasing on account has the following advantages: convenience, flexibility, and improved cash flow management. However, there are also disadvantages: overextension of credit, penalties for late payment, high interest rates, and the possibility of not getting an early payment discount.
To be able to come up with good decisions on whether or not to use purchasing on account for your business, it is necessary to consider the advantages and disadvantages of the approach. Consider your cash flow, credit status and debt management capabilities and then determine if this approach is suitable for your business. This way, it is possible to avoid the pitfalls that are inherent in purchasing on account.
