A Prepaid Expense is exactly what it looks like – a prepayment for goods and services that
will be delivered in the next accounting period (usually next year or next
quarter). Is it a good idea from the financial value perspective to make a ‘down
payment’?
Well, if your credit rating is not good enough, you may
simply have no choice. No one will sell you what you need if you do not make a
prepayment – in part or in full. If you do
have a choice, then it depends. If you get nice enough discount, it may be
worth it.
In this case, you must (1) estimate the risk that your
vendor will either not deliver at all or deliver something totally unacceptable
– it happens and (2) compare all payment alternatives from overall financial
efficiency perspective. And make payment decisions based on the result of these
comparisons.
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