Chapter 10 Accounts receivable and Inventory Management 10-1
10-1 Chapter 10 Accounts Receivable and Inventory Management
Accounts Receivable and Inventory Management Credit and collection Policies Analyzing the Credit pplicant Inventory Management and Control 10-2
10-2 Accounts Receivable and Inventory Management Credit and Collection Policies Analyzing the Credit Applicant Inventory Management and Control
Credit and Collection Policies of the firm Quality of Length of Trade Account Credit Period (1)Average Collection Period (2)Bad-debt Losses Firm Possible cash Collection Discount Program 10-3
10-3 Credit and Collection Policies of the Firm (1) Average Collection Period (2) Bad-debt Losses Quality of Trade Account Length of Credit Period Possible Cash Discount Firm Collection Program
Credit Standards Credit Standards -- The minimum quality of credit worthiness of a credit applicant that is acceptable to the firm Why lower the firm's credit standards? The financial manager should continually lower the firm's credit standards as long as profitability from the change exceeds the extra costs generated by the additional receivables 10-4
10-4 Credit Standards The financial manager should continually lower the firm’s credit standards as long as profitability from the change exceeds the extra costs generated by the additional receivables. Credit Standards -- The minimum quality of credit worthiness of a credit applicant that is acceptable to the firm. Why lower the firm’s credit standards?
Credit Standards Costs arising from relaxing credit standards A larger credit department Additional clerical work Servicing additional accounts Bad-debt losses Opportunity costs 10-5
10-5 Credit Standards A larger credit department Additional clerical work Servicing additional accounts Bad-debt losses Opportunity costs Costs arising from relaxing credit standards
Example of Relaxing Credit Standards Basket Wonders is not operating at full capacity and wants to determine if a relaxation of their credit standards will enhance profitability The firm is currently producing a single product with variable costs of $20 and selling price of $25 Relaxing credit standards is not expected to affect current customer payment habits 10-6
10-6 Example of Relaxing Credit Standards Basket Wonders is not operating at full capacity and wants to determine if a relaxation of their credit standards will enhance profitability. The firm is currently producing a single product with variable costs of $20 and selling price of $25. Relaxing credit standards is not expected to affect current customer payment habits
Example of Relaxing Credit Standards Additional annual credit sales of $120,000 and an average collection period for new accounts of 3 months is expected. The before-tax opportunity cost for each dollar of funds died-up in additional receivables is 20% Ignoring any additional bad-debt losses that may arise, should Basket Wonders relax their credit standards? 10-7
10-7 Example of Relaxing Credit Standards Additional annual credit sales of $120,000 and an average collection period for new accounts of 3 months is expected. The before-tax opportunity cost for each dollar of funds died-up in additional receivables is 20%. Ignoring any additional bad-debt losses that may arise, should Basket Wonders relax their credit standards?
Example of Relaxing Credit Standards Profitability of ( 5 contribution)x(4, 800 units) additional sales 24000 Additional ($120,000 sales)/(4 Turns)= receivables $30,000 Investment in ($20/$25)X($30,000)= add receivables $24,000 Req. pre-tax return (20%opp.cost)x$24,000= on add investment 4.800 Yes! Profits> Required pre-tax return 10-8
10-8 Example of Relaxing Credit Standards Profitability of ($5 contribution) x (4,800 units) = additional sales $24,000 Additional ($120,000 sales) / (4 Turns) = receivables $30,000 Investment in ($20/$25) x ($30,000) = add. receivables $24,000 Req. pre-tax return (20% opp. cost) x $24,000 = on add. investment $4,800 Yes! Profits > Required pre-tax return
Credit and Collection Policies of the firm Quality of Trade Account Leng credit period (1)Average Collection Period (2)Bad-debt Losses Firm Possible cash Collection Discount Program 10-9
10-9 Credit and Collection Policies of the Firm (1) Average Collection Period (2) Bad-debt Losses Quality of Trade Account Length of Credit Period Possible Cash Discount Firm Collection Program
Credit Terms Credit Terms --Specify the length of time over which credit is extended to a customer and the discount, if any, given for early payment. For example, 7/10, net 30 Credit Period - The total length of time over which credit is extended to a customer to pay a bill. For example, net 30?requires full payment to the firm within 30 days from the invoice date 10-10
10-10 Credit Terms Credit Period -- The total length of time over which credit is extended to a customer to pay a bill. For example, net 30?requires full payment to the firm within 30 days from the invoice date. Credit Terms -- Specify the length of time over which credit is extended to a customer and the discount, if any, given for early payment. For example, ?/10, net 30