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Hello.
First of all, I’m extremely grateful for your lectures, comprehensive & you make it seem very simple. THANK YOU.
I have a doubt regarding receivables and payables.
What exactly does an “overdraft” mean with regard to receivables & payables?
Also, when solving, why is it that we calculate interest savings on the new receivables?Thank you!
Thank you for your comment.
An overdraft is a negative balance at the bank (i.e. they owe money to the bank, and will therefore have to pay interest to the bank).
If (for receivables) they give credit to customers it will delay receiving the cash and therefore they will have a bigger overdraft and be paying more interest during the period. If they get the money in sooner, then the overdraft will not be so big and therefore they will be saving interest.
It is the same logic for payables – if they pay fast then the overdraft will be bigger and they will pay more interest. If they delay payment, then the overdraft will be smaller and they will save interest.
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