Professional Documents
Culture Documents
Working Capital - Accounts Receivable
Working Capital - Accounts Receivable
Working Capital - Accounts Receivable
Working Capital
Management
17-1
Accounts Receivable
1. Credit Period
is the length of time buyers are given to pay
for their purchases
17-2
Elements of Credit Policy
2. Cash Discounts
Is the price reductions given for early payment
- Lowers price.
Attracts new customers and reduces DSO.
3. Credit Standards
The required financial strength of acceptable credit
customers
– Tighter standards tend to reduce sales, but
reduce bad debt expense.
Fewer bad debts reduce DSO.
17-3
Elements of Credit Policy
4. Collection Policy
refers to the procedures used to collect past due
accounts
- How tough?
Tougher policy will reduce DSO but may damage
customer relationships.
Importance:
a. It has a major effect on sales
b. It influences the amount of funds tied up in receivables
c. It affects bad debt losses
17-5
Elements of Credit Policy
17-7
If entity reduces its DSO without adversely
affecting sales, how would this affect its cash
position?
17-8
EXERCISE:
Sales = $10,000,000;
A/R = $2,000,000;
DSO = ?
DSO = 2,000,000/(10,000,000/365)
= 73 days.
What if all customers paid on time (assuming that it
makes no sense for customers to pay earlier than 30
days), then the firm’s DSO = 30 days. If customers
paid on time, the firm’s A/R = 30 $10,000,000/365
= $821,917.81.
Cash freed up = $2,000,000 – $821,917.81 =
$1,178,082.19.
17-9
EXERCISE 2:
17-10
EXERCISE 3:
17-11
Inventory
Inventories include:
Supplies
Raw materials
Work in process
Finished good
17-12
Inventory Costs
17-14
Task of Financial Manager on Inventory
17-15
If a company reduces its inventory, without
adversely affecting sales, what effect will this have
on the cash position?
17-16
What is AP/ trade credit?
17-17
Illustration:
List Price = $100
Credit terms = 2/10, net 30
Units = 20 per day
17-21
Terms of Trade Credit
17-22
Breaking Down Trade Credit
17-23
Nominal Cost of Trade Credit
17-24
Nominal Cost of Trade Credit Formula
17-25
Effective Cost of Trade Credit
17-26
Exercises:
1. Deluter Cement, Inc. buys on terms of 2/10, net 30. It does not take
discounts, and it typically pays 30 days after the invoice date. Net
purchases amount to $720,000 per year. What is the nominal annual
percentage cost of its non-free trade credit, based on a 365-day year? Its
costly trade credit amount in dollar?
2. A company buys on terms of 10/15, net 30. It does not take the
discount, and it generally pays after 40 days. What is the nominal annual
percentage cost of its non-free trade credit, based on a 365-day year?
3. Suppose the credit terms offered to your firm by its suppliers are 3/10,
net 30 days. Your firm is not taking discounts, but is paying after 25 days
instead of waiting until Day 30. You point out that the nominal cost of not
taking the discount and paying on Day 30 is approximately 37%. But since
your firm is neither taking discounts nor paying on the due date, what is
the effective annual percentage cost of costly trade credit, using a 365-day
17-27
year?
Suggested Answer:
1. a. 37.24
b. $ 38,663.01
* net daily purchases = 720,000
365 days
* discount lost = 720,000 x 2%
2. a. 162.22 %
3. a. 109.84%
17-28
Bank Loans
17-29
Simple Annual Interest
17-30
Add-on Interest
INPUTS 12 100 -9 0
N I/YR PV PMT FV
OUTPUT 1.2043
17-32
EXERCISE:
17-34
Accruals (Accrued Liabilities)
17-35
Securities in Short-Term Financing
17-36