Topic 13: Receivables and payables management Flashcards
How to calculate the finance costs of receivables?
Finance cost of receivables = Average receivables balance x interest rate.
How to calculate the average receivables balance from receivables days?
Average receivables balance = (receivables days /365) x credit sales.
What is the risk of selling on credit?
Liquidity issues - customers paying later.
Irrecoverable debt increase meaning we would lose out more on profits and liquidity.
What are the credit control procedures to mitigate any risk of the negatives of selling on finance?
Assessing customer credit worthiness.
Setting credit limits.
Invoicing and collecting overdue amounts, with holding inventory can be used as an incentive.
Monitoring of receivables.
What are the positives and negatives of early settlement discount?
Positives:
Finance cost reduced because the average receivable falls.
Negatives:
Profit falls the bigger discount given out.
How to calculate the annual cost of discount?
Method 1: Calculate the annual percentage cost of the discount and compare to the cost of finance. Annual cost of a discount = (1+(Discount in £/Amount left to pay))^Number of periods -1
Number of periods = 365/ number of days paid early.
Method 2: Estimate the net annual cost or saving adoption the discount policy. Calculate the net annual cost without the discount then do the same with.
What is debt factoring and what do they do?
It is a form of managing receivables by outsourcing debt collection. They provide administration services, credit insurance (Sometimes protects against irrecoverable debt. Provision of finance by sending a high percentage of the invoice to the company and the rest is sales for them.
What are the advantages and disadvantages of debt factoring?
Positives:
The advanced payments helps liquidity.
Growth is financed through sales especially for young companies.
Debt factors are experts in credit control.
Frees up managements time.
Cost savings by not needing the infrastructure for internal credit controls.
Negatives:
Expensive - Typically more expensive than other forms of credit finance.
It may be perceived that the company is in financial difficulties if they are using debt factors.
Customers will know debt factors are being used and may not like the more aggressive approach
What are the steps to evaluate debt factoring arrangement?
Step 1.) Cost of current policy without factoring - Finance costs based on average receivable balance, the cost of irrecoverable debt and admin costs
Step 2.) Cost of new policy with factoring. - Factoring admin cost, Finance costs x factor interest rate.
Step 3.) Net benefit or cost of factoring. evaluate which one is best.
What is invoice discounting?
Like debt factoring but without the management service and customers dont know.
How to calculate trade payable savings for working capital ?
Finance cost savings from payables = Average payable balance x Interest rate.
Average payable balance = (Payable days/365) x Credit purchases.
What are the issues with trade payable management?
If we intentionally pay a supplier late, they could lessen or worsen out credit terms or even stop suppling to us.
Miss out on early settlement discount.
How to calculate suppliers early settlement discount?
Annual cost of not taking a discount= 1+(Discount/Amount left to pay)^Number of periods - 1
Number of periods = 365/ Number of days paid early.
What are the risks with importing and exporting?
Export credit risk - Credit may have to be longer due to the delivery time this means higher receivables days = more investment needed in working capital.
More difficult to recover debt
Foreign exchange risk
What are the different ways to eliminate export risk?
Payment in advance, which stops all worries.
Forfaiting - sells its foreign accounts receivables at a discount.
Export credit insurance
Export factoring
Letter of credit - this when a buyers bank will give the seller credit of the full amount of the invoice. The letter of credit can also be sold and brought by other investors.
Bills of exchange.
Counter trade-
