FIN%204260%20Chap%206%20SLIDES

FIN%204260%20Chap%206%20SLIDES - Part II – Mgmt of...

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Unformatted text preview: Part II – Mgmt of Working Capital Chapter 4 Inventory Management Chapter 5 Accounts Receivable Management Chapter 6 Credit Policy & Collections Chapter 7 Managing Payables & Accruals 1 Cash Flow Timeline 2 The cash conve rsion perio d is the time betwe The firm is a system of cash flows. These cash flows are unsynchronized and uncertain. Credit Policy & Collections 3 Last time we said the Credit Policy includes: 1. Credit Standards Create a profile of the minimally acceptable credit-worthy customer. 2. Credit Terms Define how long the customer has to pay and/or the offering of Cash Discounts . 3. Credit Limits Determine the amount of cumulative credit offered to a Credit Policy & Collections 4 Before, we developed strategies for extending credit to individual customers . Since significant amounts of cash can be tied up in A/R, in this chapter, we look at the Credit Policy decisions that affect all customers , as well as Collections practices and account receivable portfolio monitoring techniques. Credit Policy & Collections 5 Changes to Credit Policy are considered when: Sales volume can be enhanced. Receivables performance is unsatisfactory. Competitors change terms. Financial Managers consider the following variables: 1. Loosening or tightening credit standards. Changing Credit Terms 6 Before we said our goal is to design a credit policy that combines mutually-exclusive alternatives such that NPV is maximized. There are a variety of variables that can be Variables Sales Growth Rate (g) (from policy change) Annual Credit Sales Daily Credit Sales (S) Terms (all sales are credit sales) Cash Discount Offered - % (d) Customers Taking Discount - % (p) DSO - Discount Takers ( DP ) DSO - Non-Discount Takers ( CP ) Variable Cost Ratio (VCR) Collection/Credit Exp (EXP) at CP Bad Debt Expense Ratio (b) at CP Annual Cost of Capital (k) Daily Cost of Capital (i) Calculated Changing Credit Terms 7 If we offer a cash discount , not all customers will take it. The cash flows of discount takers versus non-discount takers will vary, as will the timing of the cash flows. Further, the bad debt experience for each could vary. Variables Sales Growth Rate (g) (from policy change) Annual Credit Sales Daily Credit Sales (S) Terms (all sales are credit sales) Cash Discount Offered - % (d) Customers Taking Discount - % (p) DSO - Discount Takers ( DP ) DSO - Non-Discount Takers ( CP ) Variable Cost Ratio (VCR) Collection/Credit Exp (EXP) at CP Bad Debt Expense Ratio (b) at CP Annual Cost of Capital (k) Daily Cost of Capital (i) Calculated Modeling Z 8 Before, we calculated the NPV from a single sale , using the following formula.using the following formula....
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This note was uploaded on 11/10/2011 for the course ECON 4260 taught by Professor Victorwakeling during the Fall '11 term at Kennesaw.

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FIN%204260%20Chap%206%20SLIDES - Part II – Mgmt of...

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