Chapter 5: Management of working capital (3) – Receivables and Payables

(a) Receivables policy. A company has sales of $20,000,000 p.a. Customers currently take credit as follows: 20% take 30 days, 50% take 60 days and 30% take 90 days. They are considering offering a discount of 1% for payment within 30 days. It is estimated that 60% of customers will take advantage of the discount (and that the remainder will take a full 90 days). The company's bank overdraft rate is 15% p.a. Calculate the net cost or benefit of the change of policy. Should they offer the discount? (Assume 365 days in a year.)

(b) Factoring proposal. Our sales are $10,000,000 p.a. and customers currently pay as follows: 20% after 1 month, 30% after 2 months and 50% after 3 months. We are considering whether or not to factor our debts. The factor will pay us 100% of debts after 1 month. The fee is 2% of turnover. As a result we will be able to lose some credit control staff at a saving of $20,000 p.a. The company's bank overdraft rate is 18% p.a. Calculate the net cost or benefit p.a. of changing to the new policy.