Chapter 9 - Working capital management - Accounts receivable and payable Flashcards
The optimum level of trade credit extended represents what?
a balance between two factors
A company’s credit policy will be influenced by what?
- demand for products
- competitors terms
- risk of irrecoverable debts
- financing costs
- costs of credit control
A credit policy has what 4 keys aspects?
- assess creditworthiness
- credit limits
- invoice promptly and collect overdue debts
- monitor the credit system
How do we calculate the cost of financing receivables?
Receivable balance x interest (overdraft) rate
How do we calculate the receivable balance?
Sales x (receivables collection period in days/365)
What is the cost for a company when they offer cash discounts?
cash lost from receiving less money from customer
What is the benefit for a company when offering a cash disount?
cash received earlier = lower receivables balance = lower working capital funding requirement
What is the calculation for the annual cost of discount?
(1 + Discount/amount left to pay) ^no. of periods - 1
where no. of periods = 365 or 52 or 12 / no. of days or weeks or months earlier the money is received
When would a discount not be offered?
If the cost of offering the discount exceeds the benefit of the saved funding cost
What is invoice discounting?
a method of raising finance against the security of receivables without using the receivables ledger administration service
What are some advantages of invoice discounting?
short term cash boost
customer is unaware
What are some disadvantages of invoice discounting?
expensive long term
extra admin costs
What is factoring?
outsourcing of the credit control department to a third party
What are some advantages of factoring?
short term cash boost
admin savings
What are some disadvantages of factoring?
- expensive long term
- customer stigma
