Leading & Lagging

System
System Posts: 100,534 🤖 Admin 🤖
edited 10:28AM in AAT student discussion
Can anyone give the exact definition of the expression "leading" & "lagging".

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  • System
    System Posts: 100,534 🤖 Admin 🤖
    Leading & Lagging

    In terms of cashflow in a business you should aim to get receivables into your bank account before you have to make payables. This means that you do not have to borrow money at a rate of interest to finance trade payables which should be financed with cash from receivables.<BR><BR>If you are 'leading' then you have a a creditor days ratio lower in days than your debtors days ratio i.e you are paying faster than you are collecting. If you are 'lagging' then you have the opposite. <BR><BR>Companies should always allow for their trade terms when working out their margins. The issue of leading is particularly acute in businesses who have long term contracts. The most obvious 'laggers' are supermarkets who get their cash in from sales within a few days but who operate to longer payment terms with their suppliers<BR><BR>David
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Leading & Lagging

    Thanks a lot for the explanation.<BR><BR>To sum it up - it is favourable to be lagging and unfavourable to be leading as far as cashflows and working capital are concerned.<BR><BR>Sharon<BR>
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Leading & Lagging

    In an ideal world your creditors and your debtors have exactly the same terms and everybody pays on time. It is favourable to 'lag' purely in cashflow terms, however the 'lag' should be down to you securing longer credit terms with your suppliers than through the actual withholding of funds. In some businesses though it is impossible to 'lag' , particularly in large construction projects.<BR><BR>David
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Leading & Lagging

    Thanks a lot - it is much clearer now.<BR><BR>Sharon

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