Chapter 16 - Working capital management (AP and AR) Flashcards
What are the 2 factors that needs to be balanced to find the optimum level of trade credit?
- Profit improvement from sales obtained by allowing credit
- Cost of credit allowed
What details must be present on payment terms?
- Price
- Delivery date
- Payment date(s)
- Discounts
For AR, what will the entity’s credit policy be influenced by?
- Demand
- Competitor’s terms
- Risk of irrecoverable debts
- Financing costs
- Cost of credit control
What are the 4 key aspects of receivables management?
- Assessing creditworthiness of customers
- Setting credit limits
- Invoicing promptly and collecting overdue debts
- Monitoring the credit system
What 2 limits need to be set when setting credit limits?
- Amount of credit available
- Length of time before payment due
What should the risk associated with a customer’s credit status be based on?
- Customer’s payment record
- New info obtained
What is the system used to follow up late payments?
- Reminder letter
- Phone calls
- Withholding supplies
- Debt collectors
- Legal action
What is a collection target?
Target for the amount of payments to collect for trade receivables within a given time period
Designed to motivate credit control staff
What are the methods used to review the receivables position?
- age analysis
- ratios
- stats
What is the formula for finance cost?
Finance cost = receivables balance x interest rate
What is the formula for receivables balance?
Receivables balance = sales x (receivables days/365)
What is the formula for the annual cost of discount?
Annual cost of discount = (1 + discount/amount left to pay) ^ no. of periods - 1
What is the formula for no. of periods?
No. of periods = days weeks or months in a year/no. of days weeks months earlier money is received
What is the annual rate of interest formula?
(100/100 - discount%) ^ no. of periods - 1
