Managing Receivables Flashcards
What can a company decide
Whether to offer credit to its ciustomers and if so on what terms
What is an investment decision?
The decision to offer credit, intended to result in higher profits
Offering extended credit
Example of offering credit?
The value of the interest charged on an overdraft to fund the period of credit
The benefit of extended credit?
Likely to be higher sales and therefore higher profit
How is extending the credit period policy assessed?
Comparing whether the benefit from higher sales is greater than finance costs associated with higher receivables
What do early settlement discounts resilt in?
A cost (discount) but results in lower receivables which can benefit a company by reducing the cost of the interest charged on an overdraft
How can an early settlement discount policy be assessed?
Comparing the cost of discount to the benefit of lower finance costs associated with lower receivables
What is credit analysis?
By asking for bank references and trade references
What does a credit agency provide?
Customer’s trading history and debt levels
What should happen with a new customer’s credit limit?
Should be fixed at a low level and only increased if they have strong payment record
What is credit control?
Customers should be monitored to ensure they are complying with agreed credit period
What is collection stage?
Prepared an aged listing of receivables
Issue regular statements
Consider debt factor
What is non-recourse factoring
Bad debts insurance is provided for by the factor, not the company
What is invoice discounting?
Factor purchases selected invoices and advance as % of their value.
When customer pays, factor will pay over the balance, less charges
Advantages of debt factor?
Internal admin costs saved
Credit analysis improved
