Accounts receivable and payable

Question 1

What is the objective of accounts receivable management?

Answer 1

To Balance the profit improvement from increased sales form allowing credt, and the cost of credit allowed

Question 2

List 5 things that influence the company’s credit policy?

(delay coming round for coffee)

Answer 2

Demand for products

Competitors terms

Risk of irrecoverable debt

Financing costs

Costs of credit control

Question 3

What are the 4 aspects of a credit policy?

Answer 3

• creditworthiness
• credit limits
• Invoice promptly
• Monitor credit system (aged debtor analysis)

Question 4

How might we assess credit worthiness of customers?

Answer 4

• bank references
• trade references
• competitors
• published info
• credit reference agencies
• company sale records
• credit scoring

Question 5

A credit limit should be set to reflect___

Answer 5

* amount if credit available

* length of time allowed before payment is due

Question 6

Why is prompt invoicing importing?

Answer 6

* Credit period only begins once an invoice is received

Question 7

How do you work out the cost of financing receivables?

Answer 7

Receivable balance =

credit sales x Receivables days

365

Question 8

What is the calculation for annual cost of discount?

Answer 8

(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.}

Question 9

What is invoice discounting?

Answer 9

A method of raising finance against the security of receivables without using the sales ledger administration services of a factor

Question 10

What is the key advantage of invoice discounting?

Answer 10

It’s a confidential service

Question 11

Why is invoice discounting more risky than factoring?

Answer 11

The client has control over its credit policy.

Question 12

Invoice discounting is usually confined to businesses with a ____

Answer 12

high sales revenue

Question 13

‘The outsourcing of the credit control department to a third party’ is…

Answer 13

Factoring

Question 14

How is factoring different to invoice discounting?

Answer 14

The debts of the company are sold to the factor who takes on the responsibility of collecting the debt for a fee.

Question 15

Which are the 3 services offered by a factor?

Answer 15

1) Debt collection and administration
2) financing
3) credit insurance

Question 16

Factoring service of debt collection and administration has recourse and non recounrse elements. What is the difference?

Answer 16

Recourse - Company bears cost of bad debt

Non recourse - Factor bears cost of bad debt

Question 17

A factors takeson the the whole of the company’s sales ledger, including issueing invoices and collecting debt.

True or False?

Answer 17

True

Question 18

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

Answer 18

1.5-3%

daily

Question 19

How does credit insurance from a Factor work?

Answer 19

• Factor insures irrecoverable debts
• Factor determines who the company is able to offer credit to.

Question 20

Which companies is factoring most suitable for?

Answer 20

• small to medium firms who can’t afford sophisticated credit and sales accounting systems;
• Rapidly expanding firms

Question 21

Factoring is designed to accelerate a companies________ and therefore improves________

Answer 21

Cashflow

Liquidity

Question 22

What are the factors to be considered when formulating a working capital management policy of trade receivables?

Answer 22

1. Level of investment in trade receivables
2. Cost of financing trade credit
3. Level of risk acceptable to company
4. The need for liquidity
5. Expertise available

Question 23

What are the key elements of establishing an accounts receivable policy?

Answer 23

1. Establish a credit policy
2. Credit assessments
3. Credit Control
4. Collection of amounts due

Question 24

What are the key factors in formulating a working capital funding policy.

Answer 24

• Dividing assets into Non current, permanent and fluctuating.
• Matching Principle (Moderate)
• Aggressive/Conservative

Question 25

How might we protect against foreign receivables?

Answer 25

• Advance payment, or payment on shipment/delivery
• Insurance
• Export factoring
• Bill of exchane
• Credit checks