Which statement describes the relationship between accounts payable practices and liquidity management?

• A. Delaying payments (higher DPO) can improve short-term liquidity but may affect supplier relationships and negotiating power.
• B. Delaying payments reduces liquidity.
• C. Higher DPO always damages credit rating with no benefit.
• D. DPO has no impact on liquidity.

Answer: (A)

Extending the time you take to pay suppliers changes how cash sits in the business. When payments are delayed, cash stays in hand longer, which improves short-term liquidity because more cash is available to meet immediate needs. This is a common working-capital tactic to smooth cash flow and can boost liquidity metrics in the near term. But pushing payments out too far can strain supplier relationships, possibly leading to less favorable terms, price increases, or even supply disruptions, which in turn can hurt long-term financial flexibility. So the statement is highlighting the practical trade-off: a short-term liquidity boost from delaying payments, balanced against potential negative effects on suppliers and future negotiating power. The other options misstate the relationship: delaying payments can improve liquidity, not reduce it in the short term; higher DPO isn’t inherently harmful to credit rating with no benefit, and DPO can influence liquidity, not be irrelevant to it.