What is wrong with this headline “Tesco delayed payments to suppliers and boosted profits”

 

 The above headline appeared in an article in The Times recently. There is something fundamentally incorrect in what it says, which I detail below.  Let me say first that I am bashing the article author or the paper, as most papers do such things when covering firm performance.

So what is wrong with above statement? Simply, it is the application of the accruals concept in accounting. Under this concept, revenues and expenses are matched, and when cash is received/paid is not relevant – at least in the calculation of profit.

Here is a simple example. Let’s assume a business sells goods for $1,000 cash but has not paid the supplier.  The goods cost $600. The profit on this is $400. If the supplier is never paid, or is paid in 10 days, the profit will not change.

While the article is incorrect in terms of the title, it’s message is solid – that you can benefit by not paying people. In the simple example above, the business has $1000 in the bank.