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Trade Credit and Short-Term Financial Management

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How does the management of trade credit impact short-term financial management?

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Solution Summary

This solution of 351 words discusses trade credit management and how it directly impacts short-term financial management with examples to illustrate the concepts. It also explains the effects of managing credit too tightly and loosely.

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Trade credit management directly impacts short-term financial management by setting strict standards for the amount of liquidity that must be kept available and the cost of credit for the firm.

Offering trade credit means that a firm will have to wait 30, 45, 60 , or even 90 days for payment on goods sold. In addition, the firm will be exposed to and will eventually have to write off bad debt. These two forces require that the firm keep extra cash or short term investments in order to be able to ...

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