The management of receivables - Change of policy - ACCA Financial Management (FM)
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49 Comments
A
AlexSingh·
So I got $18,000 savings by utilizing the factoring fee (($10,000,000-$200,000)*1/12) which is an immaterial difference of $3K but, is this an acceptable Margin of Error an examiner would consider?
Realistically as well if we are looking at it from the viewpoint of it being a receivable balance, you are technically from the factor obtaining the 100% of the balance which you are, after or before, charged a service fee for (expense wise) so maybe netting the fee from the receivables is not the right approach?
Would love your insight on this John
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AlexSingh·
Sir John - my apologies.
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John MoffatTutor·
Because the question says that the overdraft rate is 15%
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Ulemu·
Thank you sir. Can you explain why we are applying 15% interest on difference in receivables
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Rebecca·
Is this relevant for the December 2025 sitting? I can't seem to find change in policy in my Kaplan book? Thank you :)
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John MoffatTutor·
Yes, it is still examinable :-)
R
rcoelho·
Hi Mr Moffat, why do we compare a 30/60 or 90 day saving on overdraft/finance against an annual discount cost? Wouldn't the cost of discount have to be apportioned by the same 30/60 or 90 days to make it a fair comparison of cost? thanks in advance.
F
Fatima·
I agree that If receivables are paying sooner then we have money to reduce an overdraft and therefore save interest but my concern is that after applying new policy, we received 2,958,904 which we will deposit and interest will be saved so why calculating saving on difference amount.
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Fatima·
fall in receivable is my loss as i will not receive that amount because i gave discount.
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John MoffatTutor·
The total cash received doesn't change. It is simply that it is received earlier than before and so they have more cash they can deposit than before.
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Ozgur·
Hello sir, thank you for the lecture. I'm having a hard time understanding why we are multiplying the receivable difference with the overdraft rate.
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ayeodele·
sir did that to get the saving. you could have calculated the cost for financing the receivable under the old policy and the new then subtract to get the saving with is the same as what sir did...
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FathimaJazari·
thanks
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Usama·
Sir if the interest savings amount was bigger then cost p.a. then we should go with the decision of giving discount right ?
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Usama·
Never mind i figured it myself, sorry for rookie questions as my english is little weak soo sometimes i get stuck on minor things like these. I really appreciate ur amazing lectures
J
John MoffatTutor·
No problem, and thank you for the comment :-)
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Oranela·
Hi sir, we also need to see some examples when the credit period changes, for example from 30 days to 60 days. Is that possible please?
Thank you!
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John MoffatTutor·
Example 2 is an example of that. You will find many more in your Revision Kit and the understanding is exactly the same.
M
mbilal1216·
hi sir. is there any other way we can solve these examples without calculating the average receivables? this is little confusing. Thankyou
J
John MoffatTutor·
Sorry but this is really the only way.
J
JojoBeat·
Hi Mr Moffat, I have 2 questions.
1. Why can't we use the formula from previous lecture on early settlement discount to count the discount cost?
2. Why can't we just calculate the old cost vs new cost and compare to make a decision?
J
John MoffatTutor·
1. The formula in the previous lecture does not deal with debtors paying at different stages and the pattern of repayments changing if there is a discount. Nor does it deal with the fact that offering a discount might increase the level of sales overall.
2. We do effectively do that. Either compare to two costs, or look at the differences - it makes no difference.
P
Praneetha·
Hi sir, thank you for the lecture. Why is there a bank overdraft interest charged on the reduced money that the company is receiving from making sales? What is the connection between overdraft interest and receivables? Thank you
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John MoffatTutor·
If a company collects money from customers sooner, then receivables will be lower and at the same time they will have more cash which will reduce their overdraft (and save interest). It is the reverse if they take longer to collect the money from customers.
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Parth·
Hello Sir,
I have a doubt in the Example 2, it says that the 60% customers will opt for the discount ideally the company will only provide the discount to the 60 and 90 credit days debtors hence when we deduct the 60% from the 80%(50% + 30%) the new receivables will be only 20% of 90 days.
J
John MoffatTutor·
No. The question says specifically that 60% will pay within 30 days and that the remainder (which is 40%) will take the full 90 days.
B
brochamp·
Hi Sir, very helpful lecture. Please explain one thing. Should not we consider the cost of overdraft for one month in example three after the change in policy. Because adding factor does not cause us to receive full payment immediately.
Thanks.
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John MoffatTutor·
We have effectively don't that because we have looked at the cost currently compared with the cost if they all take 1 month. The saving is the difference between the two.
D
David·
Sir please how is a fall in receivables savings? I don't get it. Please help me
D
David·
I think I understand now, thank you.
J
John MoffatTutor·
Great :-)
S
Sonal·
well explained sir
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John MoffatTutor·
Thank you for your comment :-)
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Grace·
Hi, would like to clarify as below:
Is drop in average receivable mean saving in overdraft?
How to explain this? i am a bit confuse.
Thank you.
J
John MoffatTutor·
If receivables are paying sooner then we have money to reduce an overdraft and therefore save interest.
G
Grace·
Hi Sir, the overdraft is it for payment to supplier? we give discount for receiving the money faster, so that we have enough fund to pay supplier without overdraft? Correct me if i am wrong. Thank in advance.
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John MoffatTutor·
An overdraft can exist for many reasons. For example it might exist because they had just spent a lot buying a new machine. Whatever the reason for it existing, if we get customers to pay us sooner then it will help reduce the overdraft (and so save interest).
J
joelsasi·
Hi Sir ,I have a doubt regarding the OD Interest saving , why is this calculated for a year ? in this question we would receive the debt in 2.3 months , and factor will pay after 1 month, therefore OD Interest saving is for 1.3 months only right ?
Please correct me if i m wrong
Thanks.
J
John MoffatTutor·
Receiving the money earlier means that the average debtors balance is lower throughout the year. Therefore the overdraft can be lower through the year.
J
joelsasi·
ok i understand ,Thank you very much for your prompt response,much appreciated.
J
John MoffatTutor·
You are welcome :-)
K
Khushboo·
May i know where these questions are from? Study text or exam kit?
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John MoffatTutor·
From our free lecture notes (as it says at the very start of each lecture!!).
The link to download the lecture notes is just above the lecture.
Realistically as well if we are looking at it from the viewpoint of it being a receivable balance, you are technically from the factor obtaining the 100% of the balance which you are, after or before, charged a service fee for (expense wise) so maybe netting the fee from the receivables is not the right approach?
Would love your insight on this John
Thank you!
1. Why can't we use the formula from previous lecture on early settlement discount to count the discount cost?
2. Why can't we just calculate the old cost vs new cost and compare to make a decision?
2. We do effectively do that. Either compare to two costs, or look at the differences - it makes no difference.
I have a doubt in the Example 2, it says that the 60% customers will opt for the discount ideally the company will only provide the discount to the 60 and 90 credit days debtors hence when we deduct the 60% from the 80%(50% + 30%) the new receivables will be only 20% of 90 days.
Thanks.
Is drop in average receivable mean saving in overdraft?
How to explain this? i am a bit confuse.
Thank you.
Please correct me if i m wrong
Thanks.
The link to download the lecture notes is just above the lecture.