Finance for non-financial managers in Ticino: should an Italian distributor receive longer payment terms?
In Ticino, banking, fashion, trading and Italian-speaking family businesses coexist in an economy open to Lombardy, with substantial cross-border flows of workers and commerce. For a sales manager, this raises a precise financial question: under what conditions is extending an Italian distributor’s payment terms defensible?
What the literature establishes
Mitchell A. Petersen and Raghuram G. Rajan (1997, The Review of Financial Studies), using data on small US businesses, show that trade credit is not simply an undifferentiated substitute for bank lending. Their findings are consistent with suppliers having informational advantages regarding customers and providing financing when access to bank credit is constrained. Offering payment terms can therefore serve an economic purpose, without justifying every concession.
The mechanism: financing the wait for payment
Marc Deloof (2003, Journal of Business Finance & Accounting) observes a negative association between profitability and the time taken to collect receivables in a sample of Belgian companies. An unpaid sale ties up resources: extending the payment period means financing the customer for longer. This association does not, however, demonstrate that imposing shorter terms would by itself improve profitability.
The hasty conclusion
One might conclude that collecting faster is always preferable; this would overlook the commercial function of trade credit. In a hypothetical example, a fashion SME in Lugano might accept later payment to allow a Lombardy distributor to sell a collection. The decision must then weigh the expected additional commercial contribution against financing costs, non-payment risk and dependence on that distributor. (our executive and employee training programmes)
What the evidence and usual practice leave unresolved
These studies concern neither Ticino nor commercial relationships with Lombardy and do not provide an optimal payment period that can simply be transferred to this setting. An average collection period can also conceal disputed invoices or risk concentrated in a single buyer. In an Italian-speaking family business, relationship-based trust can inform the assessment, but it does not replace checking actual receipts and contractual commitments.
A practical check in Lugano
Within SHR’s “Finance for non-financial managers” programme, an exercise suitable for a trading or fashion SME in Lugano is to reconstruct a completed order cycle using invoices, due dates and bank receipts. The central measure is average daily outstanding receivables, calculated as the sum of end-of-day balances divided by the number of days observed; simulating the proposed terms then allows their increase to be estimated. The additional financing cost is estimated by applying a documented annual rate obtained from the bank to this additional balance, prorated for the period, while non-payment risk is assessed separately. The manager can thus compare a measurable concession with an explicitly stated expected commercial contribution, without treating a simulation as an achieved result. To go further: explore the Finance for Non-Financial Managers training in Lugano in the canton of Ticino, or browse our executive and employee training programmes in Switzerland.
In pictures: Finance for Non-Financial Managers in Lugano
- finance for non-financial managers
- Lugano
- research
- training lugano