11. Managing receivables and payables

Question 1

What are the 2 aspects of offering credit?

Answer 1

The payment deadline and monetary limit

Question 2

What is the equation for receivables days?

Answer 2

Receivables / Credit Sales x 365

Question 3

What is the cost of financing receivables?

Answer 3

Receivables x Relevant interest rate

Question 4

What 4 factors might influence the credit policy that a company establishes?

Answer 4

1. Costs of financing additional working capital
2. Administration costs of credit control
3. How easy it will be for customers to switch to competitors
4. Additional sales generated, weighed against bad debt

Question 5

What is the calculation for the annual cost of discount?

Answer 5

(Invoice value/value after discount)^ no of periods early -1

where no of periods = 365 or 52 or 12 / days, weeks or months early

Question 6

What are the steps of chasing a debt exceeding the credit terms?

Answer 6

Reminder letter, telephone call, withholding supply, debt collection and legal action

Question 7

What is debt factoring?

Answer 7

The business sells the debt to a factoring company, and receives around 80% of the value upfront. Once the factoring company collects the payment from the customer, the business receives the balance minus the factoring fee.

Question 8

What are the benefits of debt factoring?

Answer 8

Cash received now, risk of defaulted payment passes to factorer

Question 9

What are the disadvantages of debt factoring?

Answer 9

Lose the fee amount, can damage customer relationship, can appear to be in financial difficulty to outsiders

Question 10

What is invoice discounting?

Answer 10

The invoice discounter pays the company a ‘loan’ of around 80% of the invoice value, and once the receivable is settled the company pays back the loan plus interest - the receivable is collateral

Question 11

How do you calculate the interest payable to a factoring company?

Answer 11

(Sales factored x average rec days / 365) * interest rate

Question 12

What is the equation for payables days?

Answer 12

Payables / Credit Purchases (or COS) x 365

Question 13

What are the 7 advantages of centralised purchasing?

Answer 13

1. Access to bulk discounts
2. Access to wide network
3. Common standards
4. Efficient inventory level management
5. Easier to control inventory
6. Economies of scale in ordering
7. Can use JIT

Question 14

What are the 3 disadvantages of centralised purchasing?

Answer 14

1. Specific department requirements of the may not be met
2. Delays in receiving materials
3. Adverse staff morale