Finance of receivables — OpenTuition Forums

LLee6y ago

Hi John, I was wondering why do we use the receivables figure to determine the cost of financing receivables when really the cost element of those sales is its purchase. When a business buys a product for 100 euro then sells on credit for 130, If that sale puts us into overdraft Would we not in real life be borrowing from the bank a 100 euro not 130. Therefore if the cost of capital is 10 percent would we not use the 100 to calculate our finance cost? Thanks Lee

John MoffatTutor6y ago#1

If we received the cash from the receivables immediately then the overdraft would reduce immediately by 130. If we allow credit then there is a delay before the overdraft is reduced and therefore we are paying interest on an extra 130 over the period.