IFM10 Ch22 Lecture(1)

IFM10 Ch22 Lecture(1) - Chapter 22 Providing and Obtaining...

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Unformatted text preview: Chapter 22 Providing and Obtaining Credit 1 Topics in Chapter Receivables management Credit policy Days sales outstanding (DSO) Aging schedules Payments pattern approach Cost of bank loans 2 Elements of Credit Policy Cash Discounts: Lowers price. Attracts new customers and reduces DSO. Credit Period: How long to pay? Shorter period reduces DSO and average A/R, but it may discourage sales. 3 (More) Credit Policy (Continued) Credit Standards: Tighter standards reduce bad debt losses, but may reduce sales. Fewer bad debts reduces DSO. Collection Policy: Tougher policy will reduce DSO, but may damage customer relationships. 4 Receivables Monitoring January $100 April $300 February 200 May 200 March 300 June 100 5 Terms of sale: Net 30. Assume the following sales estimates: Expected Collections 30% pay on Day 10 (month of sale). 50% pay on Day 40 (month after sale). 20% pay on Day 70 (2 months after sale). Annual sales = 18,000 units @ $100/unit. 365-day year. 6 What is the firms expected DSO and average daily sales (ADS)? 7 DSO= 0.30(10) + 0.50(40) + 0.20(70)= 37days. How does this compare with the firms credit period? ADS= 18,000($100) 365 =$4,931.51 per day. What is the expected average accounts receivable level? How much of this amount must be financed if the profit margin is 25%? 8 A/R = (DSO)(ADS) = 37($4,931.51) = $182,466 0 .75($182,466) = $136,849. If notes payable are used to finance the A/R investment, what does the firms balance sheet look like? Assets Liabilities & Equity A/R $182,466 Notes payable $136,849 Retained earnings 45,617 $182,466 9 If bank loans cost 12 percent, what is the annual dollar cost of carrying the receivables? Cost of carrying receivables = 0.12($136,849) = $16,422. In addition, there is an opportunity cost of not having the use of the profit com- ponent of the receivables. 10 What are some factors which influence a firms receivables level? Receivables are a function of average daily sales and days sales outstanding. State of the economy, competition within the industry, and the firms credit policy all influence a firms receivables level. 11 What are some factors which influence the dollar cost of carrying receivables ? The lower the profit margin, the higher the cost of carrying receivables, because a greater portion of each sales dollar must be financed. The higher the cost of financing, the higher the dollar cost. 12 What would the receivables level be at the end of each month?...
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This note was uploaded on 02/13/2012 for the course FINA 4080 taught by Professor Mary during the Spring '11 term at Toledo.

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IFM10 Ch22 Lecture(1) - Chapter 22 Providing and Obtaining...

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