Recievables, Payables and Inventory

Question 1

What is the purpose of credit control policies

Answer 1

• Overall terms of allowing creidt: whether credit should be allowed, specific %
• Procedure for offering credit: references, monitoring, agreement
• Control : reporting, chasing slow payers

Question 2

What factors should be assessed when customers are allowed credit

Answer 2

• Additional sales volume generated
• Profitability of the extra sales
• The extra length of the average recievables collection period
• Required rate of return on investment

Question 3

What is the recievables collection period

Answer 3

Average recievables/ Sales x 365 days

Question 4

How to work out profit margin

Answer 4

Profit per unit / Sales price per unit

Question 5

How to find out rate of return on investment

Answer 5

Total gained Profits/ Total added costs x 100

Question 6

What is a settlement discount

Answer 6

Discount to encourage credit customers to pay early
- Will improve liquidity as monies are recieved earlier
- Cost involved

Question 7

What is the effective annual interest rate

Answer 7

Percentage cost of offering settlement discounts

Question 8

What is the formula for settlement discounts

Answer 8

(100/100-D)^365/T -1

x 100

D: discount offered
T: Reduction in payment period in days

Question 9

What happens when effective annula interest rate is higher than required rate of return

Answer 9

• Discount shoudl not be offered as the cost of offering is higher than return rate

Question 10

What are practical steps to reduce time taken to collect payment

Answer 10

• Obtained signed deliveriy notes for goods sent
• invoice promptly
• invoice accurately
  -Issue credit notes promptly
• Maintain regular contact with customers

Question 11

What is factoring

Answer 11

An arrangement to have debts collected by a factor company - advances a proportion of the money it is due to collect

• legally sell trade recievables to factor company to get cash earlier

Question 12

What is with recourse or without recourse

Answer 12

Factoring service where any irrecoverable debts are passed back to the entity

without- where the factor bears any irrecoverable debts

Question 13

What are the forms of factoring

Answer 13

1. 80% of debt is factored as an advance to the entity and remainder is passed over when cutomer settles
2. The factor will maintain the recibavles ledger for a fee
3. For a fee, the factor will guarantee settlement of the debt even if customers don’t pay

Question 14

What are some non financial fatcors to consider before factoring

Answer 14

• Customer relationships: barrier between suppleir and customer
• Reputation: debt factoring is percieved as a sign of financial difficulty
• Impacts on internal debt collection team: employees might see this as a risk of redundency

Question 15

What is invoice discounting

Answer 15

The sale of debts to a third party at a discount in return for prompt cash. The adminstration is managed so the debtor is unaware of the discounter’s involvement and continues to pay the supplier

Question 16

What happens if we extend payable days

Answer 16

• Improves cash flow to reduce working capital

Question 17

What are the disadvantages of taking credit

Answer 17

• Loss of settlement discounts
• Loss of goodwill if credit terms are abused

Question 18

What are the reasons why businesses will hold inventories?

Answer 18

To avoid stockouts
To avail of quantity purchase discounts
To hedge against price increases
To fulfil unexpected orders

Question 19

How should inventory policy be set

Answer 19

To ensure the lowest cost as a whole for the business
to decide the quantity of inventories

Question 20

What are the costs of holding inventory

Answer 20

-Purchase Costs
- Procuring Costs ( ordering, admin, computer, postage, unloading)
- Holding costs (storage, insurance, opportunity cost of what could be done with cash tied up in inventory)

Question 21

How to work out cost of holding a unit of inventory for a year

Answer 21

Purchase price x Cost of capital percentage

Question 22

What is the economic order quantity (EOQ)

Answer 22

The Economic order quantity tells us how much inventory to order to minimise annual inventory cost

Question 23

What is EOQ Formula

Answer 23

EOQ= Square root(2CoD/Ch)

D= annual demand in units
Co= cost of placing an order
Ch= cost of holding one unit inventory for one year

{2 COD ON CHIPS}

Question 24

What are the assumptions of EOQ

Answer 24

Demand is constant and certain(no stockouts)

Delivery is instant or lead time is constant

Purchase costs are constant (no bulk discounts)

Question 25

What is the total annual cost of holding inventory?

Answer 25

Total order costs + Total holding costs + Total purchase costs

Question 26

How to work out total order costs

Answer 26

Annual Demand/ Order quantity x cost per order

Question 27

How to work out the total holding cost

Answer 27

Order quantity / 2 x holding cost per unit

Question 28

How to work out total purchase costs

Answer 28

Annual demand x purchase price after discounts

Question 29

What is just in time approach to inventory management

Answer 29

Goods should be purchased when they are required
-stockless production

Question 30

What characteristics of operations does just in time management require

Answer 30

• High quality: no errors
• High speed
• Reliable: no hold-ups for customers
• Flexible: to respond to customer bias
• Lower costs

Question 31

What are the advantages of developing close relationships with suppliers through JIT

Answer 31

• Location of suppliers might be closer
• On time delivery
• Higher quality of supplies
• Low inventory levels

Question 32

What are the three elements of JIT philosophy?

Answer 32

1. Elimination of waste
2. Involvement of all staff in operations
3. Continuous improvement