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  • Kirim Kuliah 7 MGT Receivable

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    Seraphine B
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    This document discusses accounts receivable (A/R) management. It notes that factors like industry, credit policies, terms of sale, and collection efforts affect the level of investment in A/R, which typically makes up 25% of a firm's assets. It also explains how to calculate the annualized opportunity cost of foregoing an early payment discount and paying after the standard terms. Overall, the document provides information on evaluating credit applications, setting appropriate credit terms and policies, and assessing the risk versus return of offering customer credit.

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    Kirim Kuliah 7 Mgt Receivable

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    This document discusses accounts receivable (A/R) management. It notes that factors like industry, credit policies, terms of sale, and collection efforts affect the level of investment in A/R, which typically makes up 25% of a firm's assets. It also explains how to calculate the annualized opportunity cost of foregoing an early payment discount and paying after the standard terms. Overall, the document provides information on evaluating credit applications, setting appropriate credit terms and policies, and assessing the risk versus return of offering customer credit.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
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    172 views9 pages

    Kirim Kuliah 7 MGT Receivable

    Uploaded by

    Seraphine B
    This document discusses accounts receivable (A/R) management. It notes that factors like industry, credit policies, terms of sale, and collection efforts affect the level of investment in A/R, which typically makes up 25% of a firm's assets. It also explains how to calculate the annualized opportunity cost of foregoing an early payment discount and paying after the standard terms. Overall, the document provides information on evaluating credit applications, setting appropriate credit terms and policies, and assessing the risk versus return of offering customer credit.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Flag for inappropriate content
    Download as pptx, pdf, or txt
    of 9

    A/R Management

    • Accounts receivable ~ 25 percent of a firm's assets


    • Factors affecting investment in A/R
    – Industry
    – Percentage of credit sales to total sales
    – Level of sales
    – Credit and collection policies
    – Terms of sale
    – Quality of customer
    – Collection efforts

    1
    A/R Management
    • The terms of sale: a/b net c  customer can deduct ‘a’ % if the
    account is paid within ‘b’ days; otherwise, the account must be paid
    within ‘c’ days.
    • If the customer decides to forego the discount and not pay until the
    final payment date, the annualized opportunity cost of passing up
    this a% discount and withholding payment until the cth day is
    determined as follows:

    annualized opportunity cost of a 360


    foregoing the discount = x
    1–a c–b
    Example: Given the trade credit terms of 3/20 net 60, what is the
    annualized opportunity cost of passing up the 3-percent discount and
    withholding payment until the 60th day?

    .03 360
    = x = 27.8%
    1 – .03 60 – 20
    2
    A/R Management
    • Analyzing the credit application is a major part of accounts
    receivable management.
    – Independent credit ratings and reports,
    – Bank checking,
    – Information from other companies,
    – Past experiences,
    – Credit scoring.
    • Credit should be extended to the point that marginal profitability on
    additional sales equals the required rate of return on the additional
    investment in receivables necessary to generate those sales.

    3
    A/R Credit Policy:
    Risk vs Return
    •NPV of cash sales:
    NPVcash  Q 0  (P0  C 0 )
    •NPV of credit sales:
    h  Q ' '
    0 P0
    NPVcredit  C0Q0 
    ' '

    (1  rB )
    Decision to give sales credit, based on 4 factors:
    1. Delayed cash inflow from sales credit P0'Q0'
    2. Cash expenses for credit sales
    C0' Q0'
    3. Probability of payment, h
    4. Discount rate (cost of funds), rB.
    Mini case: cash sales vs credit sales
    • Currently, a shop can sell 1.000 items per month with a cash
    price of $500/item, cost $ 400/item
    • Sales and Marketing division try to simulate ‘net 30 credit
    sales’ that, according to their estimate, can increase sales to
    1.300 item/month, with price $530/item, and cost $ 420/item
    • Also estimated that there will be 5% bad credit, and
    assumed, cost of funds of 10%/365days.

    Do you recommend continuing the cash sales or adopting the


    credit sales? Why?

    5
    Calculation and answer
    No Credit Net30
    Items sold 1.000 1.300
    Price per item $500 $530
    cost per item $400 $420
    Probability of payment 100% 95%
    Credit period (days) 0 30
    Cost of funds 10%

    6
    Calculation and answer
    No Credit Net30
    Items sold 1.000 1.300
    Price per item $500 $530
    cost per item $400 $420
    Probability of payment 100% 95%
    Credit period (days) 0 30
    Cost of funds 10%
    NPV Cash sales:
    NPV net 30 credit sales:

    7
    Calculation and answer
    No Credit Net30
    Items sold 1.000 1.300
    Price per item $500 $530
    cost per item $400 $420
    Probability of payment 100% 95%
    Credit period (days) 0 30
    Cost of funds 10%

    NPV Cash sales:  1,000  ($500  $400)  $100,000


    NPV net 30 credit sales:

    1,300  $530  0.95


     1,300  $420  30 / 365
     $103,442 .47
    (1.10)
    LEARNING LOG

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