receivables & payables management

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This topic contains 10 replies, has 2 voices, and was last updated by  John Moffat 1 year, 1 month ago. This post has been viewed 11 times

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• #54937

Miss A..
Participant

Sir, how come we know there is net benefit in case of payables & receivables?

and what’s the formula of net benefit?

#106206

John Moffat
Keymaster

There is no formula.

You have to list the costs and the benefits (over a year) and then decide if there is a net benefit or a net cost.

Have you watched my lecture on this?

#106207

Miss A..
Participant

yes, i have watched.
Sir, I couldn’t understand how do we have net benefit in example 5 of chapter 5???

I have understood the calculation but i am unable to understand the conclusion.
”Effective cost of discount is 22% > 13% overdraft interest , so we take the discount”. Why????

#106208

Miss A..
Participant

Isn’t it like this that if we are payables we could take discount if it costs higher than overdraft interest and vice versa.
And if we are are receivables , we wont give discount if it costs higher than overdraft interest and vice versa.

Am i right???

#106209

John Moffat
Keymaster

In example 5, it is costing us 22% if we do not take the discount.
But if we do not take the discount then we pay later and save only 13% in overdraft interest.
It is better therefore to take the discount and pay early – we will gain 22% from the discount and only lose 13% from the extra overdraft interest.

Your second message is correct and agree with what I have just typed above
(because example 5 is payables)

#106210

Miss A..
Participant

ok

#106211

Miss A..
Participant

anyways , what is overdraft interest?

#106212

Miss A..
Participant

and when we pay extra overdraft interest?

#106213

John Moffat
Keymaster

An overdraft is a negative bank balance. You have to pay interest on a negative bank balance. If you pay payables early then you will have a bigger overdraft and therefore pay more interest.

#106214

Miss A..
Participant

how come is that If we pay payables early then we will have a bigger overdraft??

#106215

John Moffat
Keymaster

Because paying payables means that you are paying out cash!

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