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Lag Types and Impacts

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Payment Lag. The lag between purchase date and the date at which payment is due is known
as the terms lag. The lag between the due date and the date on which the buyer actually pays is
termed the due lag, and the lag between the purchase and actual payment dates is the pay lag.
Thus
Pay lag = terms lag + due lag
State how you would expect the following events to affect each type of lag:
a. The company imposes a service charge on late payers.
b. A recession causes customers to be short of cash.
c. The company changes its terms from net 10 to net 20.
5. Trade Credit Rates. A firm currently offers terms of sale of 3/20, net 40. What effect will the
following actions have on the implicit interest rate charged to customers that pass up the cash
discount? State whether the implicit interest rate will increase or decrease.
a. The terms are changed to 4/20, net 40.
b. The terms are changed to 3/30, net 40.
c. The terms are changed to 3/20, net 30.

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a. The company imposes a service charge on late payers.

This will decrease the pay lag as now payers will look to pay at the date of terms lag to avoid fee. this will reduce the due lag thus decreasing the paylag

b. A recession causes customers to be short of cash.

This will increase the pay lag as ...

Solution provided by:
Gaurav Agarwal, MS
Education
  • BE, Bangalore University, India
  • MS, University of Wisconsin-Madison
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