Calculating value of supplier terms

EYMatt
EYMatt Registered Posts: 13 New contributor 🐸
in AAT student discussion
Hello

I'm wondering if there's a method to calculate the value of terms offered by a supplier. For example:

Supplier A offers to supply me coffee at £5 per kilo, with terms of 30 days
Supplier B offers to supply me coffee at £4.90 per kilo, with terms of 14 days

Is there a way of calculating the time value of the 16 days difference in credit terms, so I can apply it when considering which deal to accept?

It's highly possible I've learned this already but I have a brain like a sieve sadly.

Thanks!
Matt

Comments

  • SandyHood
    SandyHood Registered, Moderator Posts: 2,027 mod
    Yes
    Supplier A offers to supply me coffee at £5 per kilo, with terms of 30 days
    Supplier B offers to supply me coffee at £4.90 per kilo, with terms of 14 days

    You are effectively paying interest of £0.10/£4.90 for 16 days credit.

    I guess you studied this in cash management.

    I make the annual percentage rate equivalent to just over 2% for 16 days as over 58.5%

    Unless no one will lend to you, I suspect that you can borrow using an overdraft at a much lower rate, so you would be better buying your coffee at the £4.90 price and 14 day credit terms.

    I buy Douwe Egberts and Lyons on a cash basis paying £1 for 250 g and I'd say that was even better still.
    Sandy
    sandy@sandyhood.com
    www.sandyhood.com

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