Chapter 16: Working Capital Management - accounts receivable and payable Flashcards
What will influence the credit policy for accounts receivable?
Demand for products
Competitors terms
Risk of irrecoverable debts
Financing costs
Costs of credit control
What are the four key aspects of receivables management?
Assessing creditworthiness of customers
Setting credit limits
Invoicing promptly and collecting overdue debts
Monitoring the credit system
What is the debt collection process?
Reminder letter
Telephone calls
Withholding supplies
Debt collectors
Legal action
What is the equation for finance costs?
Receivables balance x interest (overdraft) rate
What is the equation for receivables balance?
Sales x (Receivable days/365)
How do you calculate the annual cost of discount?
(100/100-discount%) ^no of periods -1
What are the advantages of factoring?
Short term cash boost
Administration savings
What are the disadvantages of factoring?
Expensive long term
Damages customer relationship
What are the two bases of factoring?
Without recourse
With recourse
What happens when factoring is without recourse?
The factor provides protection for the client against irrecoverable debts
What happens when factoring is with recourse?
The client must bear the loss from any irrecoverable debt
What are the advantages of invoice discounting?
Short term cash boost
Customer is unaware
What are the disadvantages of invoice discounting?
Expensive long term
Extra administration costs
What are the problems with delaying payments to suppliers?
Suppliers may refuse to supply in the future
Supplier may only supply on a cash basis
There may be a loss of reputation
Suppliers may increase price in the future
