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Hi John,
I am trying to attempt the question below:
KXP Co is an e?business which trades solely over the internet. In the last year the company
had sales of $15 million. All sales were on 30 days’ credit to commercial customers.
Extracts from the company’s most recent statement of financial position relating to working
capital are as follows:
$000
Trade receivables 2,466
Trade payables 2,220
Overdraft 3,000
In order to encourage customers to pay on time, KXP Co proposes introducing an early
settlement discount of 1% for payment within 30 days, while increasing its normal credit
period to 45 days. It is expected that, on average, 50% of customers will take the discount
and pay within 30 days, 30% of customers will pay after 45 days, and 20% of customers will
not change their current paying behaviour.Question:
I am a little confused as to where the 60 days come from as it was not mentioned in the question?The current receivables are 2,466,000. Since the sales for the year were $15M, it means that the receivables days are currently 2,466/15,000 x 365 = 60 days.
(The fact that currently sales are on 30 days credit is not relevant, because it seems customers are not paying in 30 days but are taking 60 days to pay)(If you are unsure at all about calculating receivables days in this way, then do watch my free lectures on the management of working capital.)
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