The management of receivables – Change of policy – ACCA Financial Management (FM)
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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.
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.
fall in receivable is my loss as i will not receive that amount because i gave discount.
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.
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.
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…
thanks
Sir if the interest savings amount was bigger then cost p.a. then we should go with the decision of giving discount right ?
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
No problem, and thank you for the comment 馃檪
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!
Example 2 is an example of that. You will find many more in your Revision Kit and the understanding is exactly the same.
hi sir. is there any other way we can solve these examples without calculating the average receivables? this is little confusing. Thankyou
Sorry but this is really the only way.
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?
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.
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
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.
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.
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.
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.
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.
Sir please how is a fall in receivables savings? I don’t get it. Please help me
I think I understand now, thank you.
Great 馃檪
well explained sir
Thank you for your comment 馃檪
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.
If receivables are paying sooner then we have money to reduce an overdraft and therefore save interest.
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.
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).
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.
Receiving the money earlier means that the average debtors balance is lower throughout the year. Therefore the overdraft can be lower through the year.
ok i understand ,Thank you very much for your prompt response,much appreciated.
You are welcome 馃檪
May i know where these questions are from? Study text or exam kit?
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.
Very helpful ..thank you sir
Nicely Explained Sir
Thank you for your comment 馃檪
Good lecture Sir.
Thank you for your comment 馃檪
Lesson very helpful management of inventory
Thank you for your comment 馃檪