GF583 Unit 6 Customer Payment Pause Reflection Example

A Customer That Stops Paying but Keeps Buying: A Unit 6 Seminar Reflection on a Forecast Under Stress

[Student Name]

Purdue University Global

GF583: Treasury Management I

Unit 6 Seminar Reflection

[Instructor Name]

[Date]

The distributor, its customer and every figure are composite and illustrative; the articles cited are real.

The Scenario

Our facilitator gave us the distributor's thirteen-week forecast from the previous unit and one new fact. The company's largest customer, a corporate group owning about 640 veterinary clinics and supplying about 11 percent of receipts, announced that it was converting its payables system and would make no payments in weeks five to seven. It promised to catch up in weeks eight and nine. Orders would continue as usual.

The Arithmetic in the Session

We reran the forecast, which uses a week-by-week collection curve of the kind cash forecasting research recommends (Stone & Wood, 1977). Withholding 11 percent of receipts for three weeks removes about $15.5 million of cash. The peak in week seven, already the forecast's worst week because of the vaccine invoice and a tax payment, rises from about $52.3 million to about $67.8 million. Borrowing falls back as the catch-up payments arrive in weeks eight and nine.

My First Reaction

I treated it as a financing question. The company's revolving credit line is $250 million, so another $15.5 million of borrowing seemed easy to absorb. At 5.30 percent, three to four extra weeks of borrowing costs about $55,000. My note during the session said: inconvenient, not serious.

Where the Session Pushed Back

Nadia, who works in credit at a medical supply company, raised something that had not crossed my mind: how often does a large customer's system conversion end with exactly the terms it had before? In her experience, a customer that stops paying "temporarily" often resumes on longer terms, presenting the change as a feature of the new system. If this customer came back paying in 45 days instead of 30, the company would carry about $11 million more in receivables permanently, fifteen extra days on roughly $0.7 million a day of that customer's purchases.

Owen added the second risk. A customer that keeps ordering while not paying is building up an unsecured balance. If its finances were weaker than they looked, the conversion story could be cover for a cash shortage. He suggested asking for a parent company payment guarantee or reducing the credit limit until payments resumed.

The three-week gap looked like a cost of about $55,000 in extra interest, but the real exposure was what the gap might become: either a permanent lengthening of terms worth millions in working capital or a sign that the customer itself was short of cash.

What the Facilitator Added

Our facilitator closed by connecting the case to research on trade credit, which argues that suppliers know their customers through the ordering relationship and that a shift in how a customer pays is often the first visible sign of trouble (Petersen & Rajan, 1997). Large buyers also use their bargaining power to obtain longer terms from smaller suppliers, a pattern documented across industries (Klapper et al., 2012).

How My Thinking Changed

I now read a payment interruption by a large customer as three possible events: a genuine one-time delay, a disguised change in terms, or an early warning of credit trouble. The forecast measures only the first. The treasury's response should address all three: plan the borrowing, confirm in writing that the original terms resume, and review the customer's credit.

What I Would Do as the Treasurer

I would call the customer's treasurer that week to confirm the catch-up dates in writing, reduce new shipments to the credit limit until payments resumed, and add a line to the weekly forecast showing receipts from the largest five customers separately, so that any change in their payment pattern appears immediately.

A Number I Checked Afterward

I reran the scenario assuming the customer came back paying in 45 days instead of 30. Borrowing never returned to the original path: by week 13 it ran about 11 higher than the base forecast and stayed there, because the extra receivables became a permanent part of working capital. That single change mattered more than the three-week pause itself.

What Changed in My Notes

My session notes started with a borrowing figure and ended with three phone calls: one to the customer's treasurer, one to our credit manager and one to our sales lead for that account. The forecast told us how much cash the delay would cost. It took the discussion to show that the real decisions were about the relationship, not the revolver.

What I Still Want to Know

How should a distributor price the risk that its largest customer lengthens terms, when losing that customer would cost far more than the extra working capital?

References

Klapper, L., Laeven, L., & Rajan, R. (2012). Trade credit contracts. The Review of Financial Studies, 25(3), 838-867. https://doi.org/10.1093/rfs/hhr122

Petersen, M. A., & Rajan, R. G. (1997). Trade credit: Theories and evidence. The Review of Financial Studies, 10(3), 661-691. https://doi.org/10.1093/rfs/10.3.661

Stone, B. K., & Wood, R. A. (1977). Daily cash forecasting: A simple method for implementing the distribution approach. Financial Management, 6(3), 40-50. https://doi.org/10.2307/3665255