Lesson 2

Question 1

What are the benefits of credit
management?

Answer 1

• Reducing the number of late payments
• Cash flow protection
• Increasing available business liquidity
• Executing faster and more complete debt recovery
• Improving your company’s Days Sales Outstanding (DSO)
• Identifying opportunities and freeing up your company’s working capital
• Helping you plan and analyse performance
• Reassuring potential lenders

Question 2

Cost Element

Answer 2

a. non-payment
- Bad debt losses
- cost of the credit period
- late payment cost

Question 3

Time Delay between Funds expended by seller from:

Answer 3

• Acquiring raw materials
• paying wages and other overhead costs
• production
• delivery of the goods or services to recipt of funds from the buyer

Question 4

allows an element of certainty in forward planning and can dictate strategies on investment, marketing, employment and so on.

Answer 4

Interest Rates Stability

Question 5

Assume a seller’s borrowing cost is 12% annually, because it is easily converted to 1% of the amount of unpaid invoices or debt every 30 days (monthly).

all five firms have a 5% profit level before credit cost and cost of credit is 12% annually. Here the direct impact of credit cost on Net Profit is clearly illustrated.

Answer 5

Found in laptop (figure 2.1)

Question 6

If _______________ is to be factored in, it should be added to the cost of money to get the true cost of credit.

Answer 6

rate of inflation

Question 7

if annual inflation is 6% if the firm e has 90 days collection

Answer 7

found in laptop (BELOW 2.1)

Question 8

Free credit offers

Answer 8

• 0% finance/interes
• Three years interest fee

Question 9

is as something (money) which is bought from a supplier (bank) at a price, in just the same way as any other goods or services are bought.

Answer 9

Credit

Question 10

The ________________ has to establish and operate a credit department, which involves all usual costs associated with any working office department such as staff salaries.

Answer 10

credit grantor

Question 11

Company A has a 5% profit level where credit is not allowed, and cost of credit is 12% annually. In its normal terms of 60 days, it achieves sales of £12,000,000 annually, and a net profit of £360,000.

In an attempt to increase sales, credit terms are increased to 90 days, to increase sales by one-third to £16,000,000. It’s notable that net profit drops to £320,000 as
credit cost increases.

When actual sales only increased by a quarter to £15,000,000, net profit achieved is only £300,000, a decrease of £60,000 on increased sales of £3,000,000.

In desperation, the company extends credit to 120 days and sales grew 50% higher from £12,000,000 to £18,000,000. But net profit shrinks 50% to £180,000 due to increased credit cost.

Alternatively, what can be achieved by reducing debtors if sales of £12,000,000 with debtors of £3,000,000 (90 days) cut to £2,000,000 (60 days) saves £120,000 annually – more than enough to cover the salary of a good credit manager!

Answer 11

found in fugure 2.2 laptop

Question 12

True or False

By preventing a bad debt loss, or at least reducing the loss by the time the customer fails, a credit manager avoids the impact of cancelling out previously booked profits on very large sales values.

Answer 12

True

Question 13

Find the effect of bad debts on sales

Bad Debt
- 50
- 500
- 5,000
- 10,000
- 50,000

Pre-tax profit percentage
- 5%
- %
- 10%
-12%

Answer 13

Found in figure 2.3

Question 14

Cost of borrowings annually
- 5%
- 6%
- 8%
- 10%
- 12%
- 15%

Net profit on sales
- 10%
- 8%
- 6%
- 4%
- 2%

Answer 14

Found in figure 2%

Question 15

high margins and cheap money allow a _________,

Answer 15

soft impact

Question 16

high interest rates combined with poor margins require very _____________ processes.

Answer 16

strict collection

Question 17

______________________ may have a favorable effect on the creditworthiness of an individual or a company because the supplier or lender can is assured assets can be sold off to pay off debts.

Answer 17

Ownership of valuable fixed assets

Question 18

have little or no impact on credit ability

Answer 18

Fixed Assets

Question 19

the ability of the buyer or borrower to pay bills when due

Answer 19

Credit ability

Question 20

The cash needed to run a business comes from somewhere, and the two contributors are:

Answer 20

• Borrowing
• Owner’s capital and reserves

Question 21

comes in the form of capital and loan financing

Answer 21

Borrowing

Question 22

relates to the amount put into the business by its owners – proprietors, shareholders

Answer 22

Owner’s Capital

Question 23

are basically cash retained in the business not distributed to business owners

Answer 23

Reserves

Question 24

also known as retained earnings, and capital reserves

Answer 24

Reserves

Question 25

Most credit managers recognize a third source of finance, which even though it may be unofficial is quite often seen as the most readily available

Answer 25

trade suppliers

Question 26

means that there will be a credit period that will require funding

Answer 26

granting credit

Question 27

The company’s working capital, which includes the owners’ capital and reserves, and borrowings, is further supplemented by ________________________.

Answer 27

operational cash flow

Question 28

The movement of money into and out of a business.

Answer 28

Cash Flow

Question 29

Net profits before tax plus depreciation added back.

Answer 29

Cash Flow

Question 30

Money comes in from paid ________ and goes out in ________ to achieve those sales, mainly to creditors for supplies and in salaries and operating costs.

Answer 30

sales; expenses

Question 31

is not the same nor will translate to financial success

Answer 31

Sales Volume

Question 32

In the Profit and Loss Statement, ‘_________________’ is the last cost before ‘Net Profit Before Tax (NPBT)

Answer 32

Interest Expense

Question 33

The interest item results from how the net assets have been managed, that is,:

Answer 33

a) stock control, b) credit control on debtors and c) the credit taken from suppliers.

Question 34

above the 50% level is even concerning for banks which is why they then appoint an __________________ to protect their own interests

Answer 34

Administrative Receiver

Question 35

Four key items progressive and successful companies tightly manage:

Answer 35

1. annual profit growth rate, to equal or exceed sales growth rate; 2. cash flow effectiveness, to minimize external debt; 3. efficient use of assets, i.e.,as slim as possible to a chieve sales; 4. interest cost avoidance since it drains on profits.

Question 36

is the ratio that indicates cash flow efficiency and effectiveness

Answer 36

Return On Capital Employed (ROCE)

Question 37

Formula of ROCE

Answer 37

(𝑅𝑒𝑡𝑢𝑟𝑛 (𝑁𝑃𝐵𝑇) / 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑑 (𝑖𝑛𝑐𝑙𝑢𝑑𝑖𝑛𝑔 𝑏𝑜𝑟𝑟𝑜𝑤𝑖𝑛𝑔)) 𝑥 100

Question 38

Faster cash collections improve the ROCE ratio by

Answer 38

a) reducing interest expense, which in turn increase profit, and b) reducing borrowings (borrower accounts).

Question 39

The calculation of DSO is done at

Answer 39

1) month-end, taking total debtors (current, overdue, and disputed), 2) deducting total monthly sales from the debtors figure, and 3) going back to months prior until the debtors figure is zeroed.

Question 40

The DSO can be used to show how an improvement in DSO performance can also give some degree of competitive edge. For example: You sell £14.6 million a year = £40,000 per day on average. Debtors run at about £2.4 million, that is, 60 DSO. Your competitor has similar sales but debtors of 70 DSO. So, you have £400,000 more cash to use (10 days × £40,000) Your competitor must borrow an extra £400,000 at, say, 10% per annum,

Answer 40

Example 1

Question 41

is simply arithmetical, but achieving it needs specific approaches to larger customers.

Answer 41

Cash target setting

Question 42

for prompt payment have a cost to the seller which can quite easily be calculated and is best thought of in terms of the per annum, or annualized, rate of interest.

Answer 42

Discounts

Question 43

Formula of Discounts

Answer 43

(𝑅𝑎𝑡𝑒 𝑜𝑓 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 / 𝐶𝑟𝑒𝑑𝑖𝑡 𝑝𝑒𝑟𝑖𝑜𝑑 𝑙𝑒𝑠𝑠 𝑡h𝑒 𝑑𝑖𝑠𝑐𝑜𝑢𝑛𝑡 𝑝𝑒𝑟𝑖𝑜𝑑) x 100

Question 44

solve the figure 2.7 found in excel

Answer 44

figure 2. 7

Question 45

Age Current, that is, within terms 60 days overdue 180 days overdue 12 months overdue

Answer 45

Worth % 100% 80% 50% 10%

Question 46

epresent cash and cash is the lifeblood of any business – knowing a) what we have, b) what we are expecting to have and when will enable us to know what we can spend, and when.

Answer 46

Debtors

Question 47

is controlling the ledger directly on a daily basis

Answer 47

credit manager

Question 48

has an overview as/when required;

Answer 48

finance director

Question 49

are kept informed by regular reports for action as needed.

Answer 49

the board of directors

Question 50

Company A has annual sales of 12M and net profit level before credit cost of 5% on a cash basis, while the cost of credit is at 12% yearly. The firm is changing its strategy and giving 2% discount to increase their annual sales by at least 50%. If they indeed achieve their goal with this discounting strategy, determine their cost of discounting, net profit after discount cost, and positive/negative rate change in net profit level. (Show your solution with tabular illustration. 20 points)

Answer 50

Found in SOUL

Question 51

Company B has annual sales of 4M and net profit level before credit cost of 5% on a 30 days net credit term with 1M debtors, while the cost of credit is at 12% yearly. The firm was able to triple their annual sales by extending the credit term 60 days more. Given that their total debtors also tripled along with their cost of credit, determine their cost of credit, net profit after credit cost, and positive/negative rate change in net profit level if inflation rate of 6% yearly is also factored in.

Answer 51

Found in SOUL

Question 52

Suppose firm A offers a 60-day net credit term, with annual sales of $14M, 16% profit level, debtor of $3M, how much is their cost of credit if the rate is 10.56% a year, and the rate of their actual net profit?

Answer 52

Found in SOUL

Question 53

In item no. 1 above, if inflation rate of 6% a year is factored in, how much is their cost of inflation, and the rate of their actual net profit with inflation?

Answer 53

found in SOUL

Question 54

CDB company’s debtor accounts totaled $1.25M as of June 30 2024, and monthly sales for June, May, and April are $660,000, $490,000, and $600,000 respectively, how many days is their Days Sales Outstanding (DSO) for that period?

Answer 54

Found inSOUL

Question 55

Suppose a company with sales of $24M makes profit before interest at 14% on sales, debtor account of $4.6M, interest expense at 10% p.a., and sales outstanding of 72 DSO was 6 days faster in cash collection, how much would their net profit after interest expense be after adjustment and change in borrowings?

Answer 55

Found inSOUL