7.4 Receivables Management

Question 1

Receivables Mgt (Trade Credit) generally

Answer 1

1. Must be offered competitors do
2. Customers can be charged interest if beyond terms
3. Because of 1 and 2> Sales, Finance and Accounting must be involved.

Question 2

Administrative Factors influencing of Level of Accounts Receivable

Answer 2

Soundness of:
P,P,S,F

Procedures for evaluating CREDITWORTHINESS
Formula for determining CREDIT TERMS
System for tracking receivables and Billing customers
Procedures for following up on receivables

Question 3

Reasons for NOT easing credit terms

Answer 3

Operating at Capacity

Low Gross margin per unit

Question 4

Default Risk (how to minimize)

Answer 4

Use Written agreements to Manage (not Minimize) Default

Use Credit Scoring to manage

Question 5

Cash Conversion Cycle

Answer 5

DS in Inventory, Days Sales in AR

Question 6

Calculating Average Accounts Receivable

Answer 6

Beg AR + End AR/ 2

Daily Sales x Average Collection Period

Average Collection Period x net Credit Sales
——————————————
Days in year

Net credit Sales
————————-
A/R turnover

Question 7

Assessing impact of CHANGE in Credit Terms

Answer 7

Opportunity cost of not being able to invest in funds

INVESTMENT IN RECEIVABLES=

Days in Investment YEAR

X Incremental VARIABLE COSTS

this Means Increased sales are multiplied by VARIABLE COSTS

COST of change in terms = INVESTMENT IN RECEIVABLES X Rate of money market (the Cost)

The Benefit or Loss:
Sales x Contribution Margin = Benefit
Less: Cost (FROM ABOVE)

Question 8

Factoring

Answer 8

Calculation
Receivables Submitted
Less: Holdback
Less: Factor Fee
Less: Interest Rate
Amount Received IMMEDIATELY

HOLDBACK WILL BE RECEIVED LATER

Question 9

Pledging

Answer 9

Informal Agreement (not reflected in Accounts)

A/R is pledged as collateral. Lender can sell A/R to recover loan proceeds.

Question 10

Average Collection Period

Answer 10

Average Receivables
——————————-
Daily credit sales

If sales given per year,
18,600,000 /360 = daily. 51,666

Question 11

Optimal CREDIT policy does not seek to Merely increase sales

Other options and considerations

Answer 11

• could offer discounts, offer longer terms, accept riskier customers
• can’t ignore increased bad debts, negative effect on cash flows

Question 12

Default Risk

Answer 12

Risk for is unwilling or unable to pay