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Regarding to Dec 2012 Q3(Emile),
How do we calculate the amount of receivable/payment we can realise by reducing/increasing the payment term.For example, currently having a trade receivable of $260, with an average payment term of 59 days.
If we reduced the term to 30days, how to calculate the amount we can realise? (Answer provided is $128.5 without calculation).
As the current collection period is 59.31 days, you simply assume that this represents 59 days of sales If this is reduced to 30 days and 29 days-worth of sales will be received:
29 x 260/59 = 128
Similarly, reducing to 40 days releases 19 says worth (ie 19 days’ more sales proceeds received)
19 x 260/59 = 84
There are some rounding differences somewhere in the model answer, but the above shows the principle.
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