Stretching the Trade

Stretching the trade was a phrase I heard many moons ago.  And, before we dig in to the details, I’ll spill the beans.

Stretching the Trade: Definition

Stretching the trade is a phrase used to describe extending Accounts Payable.  That is, increasing Accounts Payable.

Terms

If you’ve been in business for awhile, then you have been accustomed to how things work, so to speak.  Here are some general terms you may have come across.

COD

Typically, when you begin purchasing from a vendor, they may put you on COD, or Cash on Delivery.  This means pay first — get the goods and/or services later.  Obviously, since you are paying cash first, you’re not buying on credit.

2%, net 30

Another term is 2%, net 30.  This is an old school term.  This is a typical “credit” practice.  If a vendor puts you on “2%, net 30,” this is what it means: If you pay your bill before 30 days transpires, you can deduct 2%.  Otherwise, you pay the full amount due on day 30.

As my accounting instructor told the class many years ago, it’s really a misnomer.  In actuality, it should be “2%, gross 30.”  This means you can take a 2% discount if you pay before the 30 days are up.  Otherwise, you have to pay the full amount on day 30.

Nevertheless, 2%, net 30 is the term.

Accounts Payable and Cash Flow

If you are a buyer, the extension of credit (to you) is a cash flow enhancement.  In essence, you are receiving goods and/or services without having to pay for them (initially).

This means you can sell your goods and services without having to pay for what you used to deliver them.

Of course, you, as a seller, might also extend terms.  But, let’s just look at the “buy side” of the equation.

When you purchase on account and don’t have to pay immediately, it is a cash flow boost.  Why?  Because you don’t have to spend the cash yet.

Stretching the Trade

Whether by design or default, stretching the trade refers to the practice of increasing Accounts Payable.

What happens if you don’t pay in 30 days?  Well, some companies augment 2%, net 30 with a 2% finance charge if not paid in 30 days.

Otherwise, in practice, sometimes nothing.

Example

Let’s say that a company has total Accounts Payable of $600,000.  This total might be due to a variety of vendors.  And, let’s say that the company is paying their bills in 30 days (on average).

If, by default or design, the company decides to stretch the trade and pay [on average] in 45 days, then Accounts Payable will grow to $900,000.  And, if Accounts Payable grows by $300,000, this puts an extra $300,000 in the bank account.

Caveat

Now, we aren’t telling you to do this as a directive.  We’re only describing a term.

As with everything in life, it’s important to have good relationships with your customers, employees, and suppliers.  So, be encouraged to do right by all.

So, the extension of credit terms should be something that you and your creditors discuss and agree upon.

A Big ‘Thank You’

I thank God for many decades of being — and serving — in business.  In some of the capacities in which I served, I was blessed to work through some pretty tough economic cycles.

And, in going through these cycles, I have had enjoyed the blessings of others working with me and the companies in which I served.  These blessings have entailed being the beneficiary or having “relaxed” credit terms as we worked out of ruts and rough patches.  This means that the companies I managed were allowed to be the beneficiaries of stretching the trade.

Thank you to all of you who have blessed me and others with your mercy.

In America, we’re all in this together.  Some of the tough times were the best times because of the blessings that resulted from working with others.  We were able to come together and work through tough times.

Contact us if we can be of any encouragement to you.