FIN%204260%20Chapter%205

FIN%204260%20Chapter%205 - Part II Mgmt of Working Capital...

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Part II – Mgmt of Working Capital Chapt ers Cover ed 1 Chapter 4 Inventory Management Chapter 5 Accounts Receivable Management Chapter 6 Chapter 7 Managing Payables & Accruals
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Cash Flow Timeline 2 The firm is a system of cash flows. These cash flows are
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A/R Management 3 In most industries, it is customary to offer trade credit allowing customers a delay between receipt of goods and the obligation to pay. Trade credit does not have an explicit cost. It is considered either a cost of doing business or built into product pricing. Its convenience is thought to trigger larger orders and repeat sales.
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Cash Flow Slowdown 4 Businesses, on average, waited nearly 28 days to get paid by customers in 2010 compared with the nearly 24 days they waited in 2009.
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A/R Management 5 The Marketing Strategy must strike the balance between growing sales/capturing market share and making prudent credit decisions. How much credit should be offered? Too stringent terms can lead to lost sales and customers. Too lenient terms can lead to charge-offs.
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A/R Management 6 Marketing Strategy Market Share Obj. Aggregate Inv. in A/R Credit Terms Credit Standards Total Dollar Investment Length of Time to Pay Acceptance of Marg. Cust. Max Shareholder Value
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Credit (Standards) Decision Process 7 Marketing contact Credit investigation Customer contact for information Finalize written documents Establish customer credit file Financial analysis Time
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Credit Administration / Policy 8 Establishing 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 single customer and/or group of customers.
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1. Credit Standards 9 Financial and non-financial data is used to establish the profile of the minimally acceptable credit-worthy customer , which could include: Smaller amounts and/or shorter terms. A probationary period. Collateral or a Bank Letter of Credit.
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1. Credit Standards 10 Unique customer data is requested to assess credit-worthiness and is compared to the benchmark, including: Client-provided data, such as financial statements and receivable agings (next slide) from which ratio and trend analysis and industry comparisons can be performed. Subscriber-based credit reporting agencies, such as D&B, which provide payment records, maximum credit lines, balance sheet data,
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A/R Aging Schedule 11 Essentials of Corporate Finance (Ross)
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12 Size of proposed credit limit No Order and credit request received New/increased credit limit Material change in customer status Redo credit investigation Medium Small Large In-depth credit invest. Moderate
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FIN%204260%20Chapter%205 - Part II Mgmt of Working Capital...

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