Accounts receivable and payable Flashcards
What is the objective of accounts receivable management?
To Balance the profit improvement from increased sales form allowing credt, and the cost of credit allowed
List 5 things that influence the company’s credit policy?
(delay coming round for coffee)
Demand for products
Competitors terms
Risk of irrecoverable debt
Financing costs
Costs of credit control
What are the 4 aspects of a credit policy?
- creditworthiness
- credit limits
- Invoice promptly
- Monitor credit system (aged debtor analysis)
How might we assess credit worthiness of customers?
- bank references
- trade references
- competitors
- published info
- credit reference agencies
- company sale records
- credit scoring
A credit limit should be set to reflect___
* amount if credit available
* length of time allowed before payment is due
Why is prompt invoicing importing?
* Credit period only begins once an invoice is received
How do you work out the cost of financing receivables?
Receivable balance =
credit sales x Receivables days
365
What is the calculation for annual cost of discount?
(1+ discount/Amount left to pay)no. periods -1
Where no. periods is = <u>Year/ months/days</u>
no. days/weeks/months earlier money is received.
What is invoice discounting?
A method of raising finance against the security of receivables without using the sales ledger administration services of a factor
What is the key advantage of invoice discounting?
It’s a confidential service
Why is invoice discounting more risky than factoring?
The client has control over its credit policy.
Invoice discounting is usually confined to businesses with a ____
high sales revenue
‘The outsourcing of the credit control department to a third party’ is…
Factoring
How is factoring different to invoice discounting?
The debts of the company are sold to the factor who takes on the responsibility of collecting the debt for a fee.
Which are the 3 services offered by a factor?
1) Debt collection and administration
2) financing
3) credit insurance
Factoring service of debt collection and administration has recourse and non recounrse elements. What is the difference?
Recourse - Company bears cost of bad debt
Non recourse - Factor bears cost of bad debt
A factors takeson the the whole of the company’s sales ledger, including issueing invoices and collecting debt.
True or False?
True
In addition to taking over the sales ledger, the factoring will advance 80% of the value of debt collected and the remainder (less the finance cost) will be paid when the debt is collected. The fanctor is therefore a source of finance, usually charging ________ above the bank rate and charged on a ________basis
1.5-3%
daily
How does credit insurance from a Factor work?
- Factor insures irrecoverable debts
- Factor determines who the company is able to offer credit to.
Which companies is factoring most suitable for?
- small to medium firms who can’t afford sophisticated credit and sales accounting systems;
- Rapidly expanding firms
Factoring is designed to accelerate a companies________ and therefore improves________
Cashflow
Liquidity
What are the factors to be considered when formulating a working capital management policy of trade receivables?
- Level of investment in trade receivables
- Cost of financing trade credit
- Level of risk acceptable to company
- The need for liquidity
- Expertise available
What are the key elements of establishing an accounts receivable policy?
- Establish a credit policy
- Credit assessments
- Credit Control
- Collection of amounts due
What are the key factors in formulating a working capital funding policy.
- Dividing assets into Non current, permanent and fluctuating.
- Matching Principle (Moderate)
- Aggressive/Conservative
How might we protect against foreign receivables?
- Advance payment, or payment on shipment/delivery
- Insurance
- Export factoring
- Bill of exchane
- Credit checks
