12: Receivables, Payables and Inventory Flashcards
(23 cards)
things to think about with credit control policies
overall terms
procedures for offering credit
control
receivables collection period / receivables days ratio
tells you how long on average customers take to pay you
average receivables / sales x 365
settlement / early payment discounts
incentivising people not to take full credit terms
big cost involved so you need to calculate the effective annual interest rate to work out cost
settlement discount formula
[(100 / 100 - d) ^ (365/t) ] - 1
t as the reduction in payment period in days - how any days saved
managing receivables
signed delivery notes for goods sent
invoicing promptly and accurately
reissuing promptly if there are inaccuracies
maintaining regular contact with customers
effective credit control
setting credit control targets
debts should be chased as soon as they fall overdue
maintain regular contact
legal process
factoring
arrangements to have debts collected by a factor company, which advances a proportion of money it is due to collect
with recourse vs. without recourse
- with recourse, debts are passed back to you
- without recourse, factor bears the cost of debts
non-financial factors to think about with factoring
reputational issues
issues affecting customer relationships
internal impact on employees
invoice discounting
selling specific invoices/debts to a third-party
- with a factor, selling everything but here only specific invoices
still get a cash injection but selling debt to a third party at a discount
customer does not know this has happened
age analysis of payables
takes different suppliers, the total balance owed and how long that has been outstanding for
why do businesses hold inventory?
sale to make profit
- holding stock to avoid stockouts
discounts on purchasing
hedging against price increases
unexpected/additional orders
costs of holding inventory
cost of purchase
procurement costs
holding costs
economic order of quantity (EOQ) model
achieving the lowest cost of inventory in terms of the cost of buying and holding inventory
best quantity minimising annual inventory costs
calculation of EOQ model
square root 2 CoD and chips
square root [ (2 x cost of placing the order x demand) / cost of holding one inventory for one year ]
assumptions of EOQ model
demand is constant and certain
delivery is instantaneous or lead time is constant
purchase costs are constant
EOQ and discounts
slight change if bulk buying discounts are available
- EOQ changes as holding costs are often a % of purchase price
5 step approach for EOQ and discounts
- calculate EOQ in the normal way
- recalculate EOQ if it falls in a discount band
- calculate annual costs using EOQ
- calculate annual costs at the lower boundary of each discount band above the EOQ
- select order quantity minimising costs
total order costs
annual demand / order quantity x cost per order
total holding cost
order quantity / 2 x holding cost
total purchase costs
annual demand x purchase price (after discount)
just in time (JIT)
buying inventory only as and when needed
characteristics of JIT
high quality
speed
reliability
flexibility
lower costs
3 elements of JIT
elimination of waste
involvement of all staff in the operation
continuous improvement
