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What is meant by cost of financing receivables? What is meant by cost of financing payables? Why does it have to be financed?
All of the working capital (inventory + receivables + cash – payables) needs to be financed.
To explain why, think about the Statement of Financial Position. If the receivables figure increases, then the total assets increase. For the Statement to balance, this money has to come from somewhere – either we need to increase our long-term finance (equity and/or long term debt borrowing), or we need to increase our short-term borrowing (overdraft).
This is what we mean by it being needed to be financed.
For a fuller explanation, watch my introduction lecture to F9 and watch my lectures on working capital management.
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