Managing receivables and payables Flashcards
What does receivables mgmt and payables mgmt involve?
Motivating customers to pay quickly
Extending credit periods with suppliers for as cheaply as possible
What should be considered re receivables mgmt?
Cash or early discount payment - speed up collection but lose money from sales
Charge interest on late payments
Monitor debtors
Adjust credit terms
Determine suitable credit limit
Assess customer credit risk - avoid bad debt
How can a business assess customer credit risk?
Get a reference from their bank
Get a reference from other suppliers
Use a credit reference agency
Find out credit score
Request financial statements
Review available background company info
Following the above is considered good credit control
What is the credit cycle?
The interlude between placing an order and receiving the goods
- Order placed
- Credit terms agreed
- Goods dispatched
- Customer invoiced
- Debt collection
- Receipt of all payments
The goal of mgmt should be to reduce this cycle as much as possible
What is receivables age analysis?
It shows customers with outstanding debts and the amount of time their debt has been outstanding
Age analysis summaries can be used to set collection targets and motivate staff
What are debt collection procedures?
Effective debt collection procedures need well trained credit control staff to maintain co-operative relationships with customers.
If payment is not recieved on the due date, the invoice should be marked as overdue and the following steps taken:
1. Follow-up
2. Charging interest
3.FInal notice
4.Writing off
What are settlement discounts?
When an entity offers a customer a discount for paying now or in cash
Benefit - improves liquidity as cash is received earlier
Cost - the company receives less than full value of the sale
What is the cost of discount formula?
(100% / 100% - discount) ^ (365 / no. of days early -1
Calculate whether company C should offer a settlement discount.
Revenue: £200k
Avg receivables: £40k
2% settlement discount for payments of debt within 14 days
Cost of financing receivables: 12%
£40k / £200k * 365 = 73 days
73 days - 14 days = 59 days early
100% / (100% - 2%) ^ (365 / 59) - 1 = 13.3%
12% - 13.3% = (1.3%)
Do not do settlement discount. More expensive that financing option
What is credit insurance?
Insurance taken out on credit extended to customers. Insurers will pay compensation to companies if customers don’t pay, although limitations may be set e.g. max value or min credit rating
What is factoring?
Companies sell debts to another entity at a discount. The factor then gains the difference between the full price and the discounted price on successfully collecting the debt
Factors can also manage the sales ledger on behalf of the company
What is finance with recourse?
The factor pays an advance on an agreed debt. They pay the rest of the debt once it is collected, possibly after deducting a fee. They will also receive interest on the advance
What is factoring without recourse?
Same as factoring with recourse but the factor guarantees debt payment even if the debtor never pays
What are the pros of factoring?
Does not require assets to be pledged as security
May be only source of financing available
Often more proficient at debt collection
What are the cons of factoring?
Strain on customer relationships
Undermine current staff and affect morale
Associated with financial difficulty
Negatively affect business reputation
Lengthy and costly re-establishment of credit control team if factoring is no longer used
Maye be easier to get line of credit from bank
