BUSINESS

FINANCE
3rd Quarter

Prepared By:
MARY MILDRED P. DE JESUS
OBJECTIVE:
01 Explain the tools in managing cash,
receivables, and inventory.

Describe the concepts and tools in Working

02 Capital Management.

03
 ExplaIn TOOls In managIng
Cash,
rECEIVaBlEs, and InVEnTOry
rECEIVaBlE managEmEnT
TOOl
 Receivable Management aims to design
policies regarding the granting of credit and
the collection of receivables with high
consideration on the costs, risk and
benefits.
 A trade off exists between benefit and cost.
 The objective of receivable management can
be clearly understood once the nature of
receivable is fully understood.
rECEIVaBlE managEmEnT TOOl
 Receivable arises from credit sales or sales
on account. In this type of sales, the
business does not receive any cash but
earns only the right to collect from the
customer. In credit sales, the element of
risks is present. For example, there is a
risk of not being paid, or the so-called
default risk.
rECEIVaBlE managEmEnT TOOl
 In a similar manner, the sale of goods or
services on account carrier costs. The costs
includes, among others, the following:
 Administrative Cost – cost in the form of
salaries of employees keeping and
maintaining the records of the customers.
 Capital Cost – cost inf the form of interest
once production is financed by creditors
or as opportunity cost if financed by
internal sources.
rECEIVaBlE managEmEnT TOOl
 Credit and Collection Cost – cost
incurred during the extension of credit
and collection of receivables.
 Default Cost – all cost related to the
receivable that could not be collected (e.g.,
administrative, capital, credit and
collection cost) including the cost of goods
sold.
 rECEIVaBlE managEmEnT TOOl
Reason for the sale of goods or services on credit

To increase the sales volume

To improve the profitability level

To increase the Market share

To win new customers and retain the old ones.

To become competitive in the market.

margInal analysIs Of CrEdIT pOlICy
 This policy compares the expected
incremental profit contribution or returns
with the incremental costs from the change in
credit policy.
 The term “incremental” refers to the amount
of change.
 For example: the old revenue is 180,000. The
expected revenue is 300,000 the following
year. Thus, the incremental revenue is
120,000 (300,000-180,000).
 UsIng ThE InCrEmEnTal analysIs
apprOaCh, ThE dECIsIOn may BE TO:
Adopt the proposed change in credit policy when:
incremental profit contribution > incremental
cost
Reject the proposed change in credit policy when:
incremental profit contribution < incremental
cost
Retain the existing credit policy when:
incremental profit contribution = incremental
cost.
 IllUsTraTIOn:
 All sales of the PRINCESS Company are made on
credit with the term n/30. The business has an
average collection period of 90 days. The current
annual credit sales of the business is P12,000,000.
 Princess considers changing the credit policy by
offering credit terms of 1/10, n/30. With this proposed
change, the company expects that 80% of the
customers will avail themselves of the discount, and
the collection period is expected to change to 60 days.
The opportunity cost on the receivable is 10%.
 Required: Determine if there is a need to change the
credit term.
 IllUsTraTIOn:
 Answer: No expected contribution margin is present;
hence the cost between the existing credit terms and
the proposed credit term will be compared.
 Under the present credit terms, it takes 90 days to
collect the receivable. It indicates that the working
capital is tied up to the receivable for 90 days or four
months (360/90) during the year.
 The average working capital tied up to the receivable
for four months amounts to 3 million (12 million / 4
months). Therefore, the opportunity cost on the
receivable is 300,000 (3,000,000 x 10%).
 IllUsTraTIOn:
 In the proposed credit terms, the collection period will
be reduce to 60 days. Likewise, the working capital
tied up to the receivable will be 2,000,000
(12,000,000/6). The opportunity cost in this case will
be 200,000 (2,000,000 * 10%). However, the company
is expected to give a cash discount of 1% to the 9,600
credit sales (12,000,000 * 80%).
 Total cash discounts to be provided will amount to
96,000 (9,600,000 *1%).
 The total cost under the proposed credit terms will
then be 296,000 (200,000 + 96,000).
 IllUsTraTIOn:
 Since the cost of 296,000 under the proposed credit terms is
lower than the cost under the present credit terms of 300,000,
PRINCESS may change its credit terms.
 pOlICy On granTIng Of CrEdIT
The credit standards define the guidelines adopted
by the company when determining
or assessing credit customers. Credit customers
are usually evaluated using the 5 C’s of
credit as follows:
1. Character- it includes the reputation and
the track record of the customers.
2. Capacity - it refers to the ability of the
customer to pay including the working
capital position and liquidity or solvency
of the business.
pOlICy On granTIng Of CrEdIT
3. Collateral- it pertains to the type and
kind of assets being pledged as
guarantee for the credit.
4. Capital - it refers to the financial position
of the borrower-whether stable and
solvent.
5. Condition - it specifies the market
and economic conditions of the
business where the borrower belongs,
including profitability of the business.
pOlICy On granTIng Of CrEdIT
 Credit Terms – refers to the standard
condition offered by the seller to the buyer
for goods sold on credit.
The three major components usually
included on credit terms are:
1. Credit Period – the length of time or the
number of days granted to the customer
before the scheduled payment due date.
pOlICy On granTIng Of CrEdIT
The three major components usually
included on credit terms are:
2. Discount Period – the length of time or
number of days that the customer an
avail of the cash discount.
3. Discount – the amount deducted from
the invoice price of the goods once
payment is made within the discount
period.
Thank you
• https://www.keka.com/glossar
y/budget

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