Vinu: Hey Manu, I was curious about the role creditors play in the working capital cycle. Could you enlighten me?

Manu: Hi Vinu! Creditors play an important role in the working capital cycle. They are the suppliers or vendors from whom a company purchases goods or services on credit. These creditors provide the company with necessary resources to operate and maintain its day-to-day activities.

Vinu: I see. So, how do these creditors impact the working capital cycle?

Manu: Well, when a company purchases goods or services on credit, it essentially extends the payment period. This allows the company to acquire the necessary inventory or supplies without immediately paying for them. As a result, the company can utilize its available cash for other operational needs or investments.

Vinu:

Manu: Good question, Vinu. Creditors benefit from offering credit in a couple of ways. First, it helps them build and maintain business relationships with the company as a trusted supplier. By providing credit, they can attract and retain customers. Second, it allows them to generate revenue through interest charges or discounts for early payment, depending on the agreed-upon terms.

Vinu: Ah, I see the mutual benefits now. How does this credit from creditors affect the company's working capital?

Manu: The credit from creditors affects the company's working capital by increasing the accounts payable (creditor) balance. Accounts payable represents the amount the company owes to its creditors for the goods or services received on credit. This increase in accounts payable acts as a source of working capital for the company, as it can delay cash outflows and maintain liquidity.

Vinu: So, would it be fair to say that creditors contribute to the company's short-term financing?

Manu: Absolutely, Vinu! Creditors indeed contribute to the company's short-term financing. By offering credit, they provide the company with an important source of funds to support its working capital needs. This short-term financing helps the company manage its cash flow, inventory levels, and overall liquidity.

Vinu: That makes sense. Are there any challenges or risks associated with relying on creditors for working capital?

Manu: Yes, there can be challenges and risks. Heavy reliance on creditors for working capital may increase the company's dependency on external funding sources. Late payments or strained relationships with creditors can lead to supply disruptions or strained credit terms. Additionally, if the company faces financial difficulties, creditors may tighten their credit terms or demand immediate payment, creating liquidity challenges.

Vinu: I see, it's important to maintain good relationships with creditors and manage the associated risks. Thank you for explaining the role of creditors in the working capital cycle, Manu.

Manu: You're welcome, Vinu! I'm glad I could provide you with the information. If you have any more questions, feel free to ask.