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Lecture 44 - Business Finance(ACC501 Lesson 44 Review of...

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234 Business Finance (ACC501) Lesson 44 Review of the Previous Lecture Float and Cash Management Cash Disbursement Investing Idle Cash Credits and Receivables Terms of Sale Topics under Discussion Credits and Receivables Credit Period Discount Instruments Optimal Credit Policy Credit Analysis Collection Policy Credits and Receivables Credit Period The basic length of time for which the credit is granted. If a cash discount is offered, then credit period has two components Net credit period – length of time customer has to pay Cash discount period – time during which discount is a vailable Invoice date is the shipping date or billing date of invoice, a written account of merchandise shipped to the buyer. Two most important factors influencing the length of credit period are buyer’s inventory period and operating cycle. The shorter these are, the shorter the credit period will be We know that operating cycle has two components Inventory period Receivables period By extending credit we finance a portion of our buyer’s operating cycle and shorten the buyer’s cash cycle If our credit period exceeds the buyer’s inventory period, we are not only financing buyer’s inventory purchases but part of the buyer’s receivables as well
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235 If our credit period exceeds buyer’s operating cycle, then we are providing financing for customer’s business beyond the immediate purchase and sale of our merchandise Buyer has a loan from us even after the merchandise is resold A number of other factors which influence the credit period are: Perishability and collateral value Perishable items have rapid turnover and low collateral value; thus credit periods for these goods are shorter Consumer demand Well established products have rapid turnover. While newer or slow moving products will require longer credit periods.
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