chap020Working Capital Management(公司金融原理-台湾大学,Matthew Will)
公司理财Chap020
¥
£
Credit Agricole
S¥/£(0) = 85
20-12
Triangular Arbitrage
Sell $100,000 for £at S£(0) = 1.50 receive £150,000
Sell our £150,000 for ¥at S¥/£(0) = 85 receive ¥12,750,000
currencies, e.g., the exchange rate between £ and
¥ Euro (€): the single currency of the European
Monetary Union which was adopted by Member States on 1 January 1999. Eurobonds: bonds denominated in a particular currency (usually the issuer’s home currency) and issued simultaneously in the bond markets of several countries
◦ Spot rate – the exchange rate for an immediate trade
Forward trade – agree today to exchange currency at some future date and some specified price (also called a forward contract)
20-3
Terminology
Eurocurrency: money deposited in a financial center outside the home country. Eurodollars are dollar deposits held outside the U.S.; Euroyen are yen denominated deposits held outside Japan.
chapter公司金融概论PPT课件
25
二、公司的金融活动
1.投资决策 2.融资决策 3.营运资本管理
26
三、代理问题与公司控制
（一）公司目标与委托—代理问题 “委托代理问题（principal and agent problem)的文
献涉及一个人即委托人如何设计一个补偿系统（一个 契约）来驱动另一个人（代理人）为了委托人的利益 行动。” “委托代理问题这个名词最早来自罗斯 （Ross,1973），其他早期对这个文献作出贡献的包 括米利斯（Mirrlees,1974年 ,1976年）和斯蒂格利茨 （Stiglitz,1974年，1975年）” ——《新帕尔格雷夫货币金融大辞典》第三卷第175 页。
中国中国人民大学出版社
推荐阅读的教材：
马亚明、田存志主编：《现代公司金融学》，中国金融 出版社
朱叶编著：《公司金融》，北京大学出版社 斯蒂芬.罗斯：《公司理财》，机械工业出版社
3
第一章 公司金融导论
4
第一节 什么是公司金融
一.什么是现代金融学 Stephen .Ross在《新帕尔格雷夫货币金融大辞典》
11
第二节 公司金融的目标
一、利润最大化 缺陷
没有考虑利润获取与资本投入之间的关系 没有考虑资金的时间价值 没有考虑风险
二、每股收益最大化（EPS）
每股当前价值最大化 没有考虑资金的时间价值 没有考虑风险
三、公司价值最大化 使现有股票的每股当前价值最大化。
12
更一般的表述： 使现有所有者权益的市场价值最大化。
（三）公司（corporation)
24
企业不同组织形式的比较
组织形式 法律地位 承担责任
个人独资制 自然人企业 无限责任
公司金融stephenChap02-资料
2-6
Liquidity
• Refers to the ease and quickness with which assets can be converted to cash—without a significant loss in value
rates • Know the difference between accounting income and
cash flow • Calculate a firm’s cash flow
2-1
Chapter Outline
2.1 The Balance Sheet 2.2 The Income Statement 2.3 Taxes 2.4 Net Working Capital 2.5 Financial Cash Flow 2.6 The Accounting Statement of Cash Flows 2.7 Cash Flow Management
eqLeussitpremasureynsttoc.k Total equity
(26) (20) $805 $725
Total liabilities and stockholder's equity $1,879 $1,742
2-5
Balance Sheet Analysis
• When analyzing a balance sheet, the Finance Manager should be aware of three concerns:
time
it
wo$u21l3d
Finance and Working Capital Management
Finance and working capital management are crucial aspects ofrunning a successful business. Working capital management involves managing a company's short-term assets and liabilities to ensurethat it can meet its short-term obligations. This includes managing cash, accounts receivable, inventory, and accounts payable.Effective working capital management is essential for maintainingthe liquidity and solvency of a business. It ensures that the company has enough funds to cover its day-to-day operating expenses and can take advantage of opportunities for growth and expansion. By efficiently managing working capital, a business can improve its cash flow, reduce the need for external financing, and minimize the risk of financial distress.One key aspect of working capital management is managing the cash conversion cycle, which involves the time it takes for a company to convert its investments in inventory and accounts receivable into cash. By reducing the cash conversion cycle, a business can free up cash that can be used for other purposes, such as investing in new projects or paying down debt.In addition to managing cash flow, effective working capital management also involves optimizing the levels of inventory and accounts receivable. By minimizing inventory levels and collecting accounts receivable in a timely manner, a business can reduce its investment in working capital and improve its overall financial performance.Financial management is also an integral part of working capital management. Businesses need to carefully monitor their financial statements, including the balance sheet, income statement, and cash flow statement, to assess their financial health and identify areas for improvement. By analyzing these financial statements, businesses can identify opportunities to improve their working capital management and overall financial performance.In conclusion, finance and working capital management are vital for the success of any business. By effectively managing working capital and maintaining a strong financial position, businesses can ensure their short-term and long-term viability and create a solid foundation for growth and prosperity.。
公司理财(双语)working capital
Currenty Assets Cash Other shirt-term financial investments Accounts receivable Inventories Other current asets Total 265 199 634 570 311 1979 Current Liabilities Short-term loans Accounts payable Accrued income taxes Current payments due on long-term debt Other current liabilities Total 138 436 65 104 723 1466
cash
Miller-Orr
30- 15
Upper limit
Cash Balance
Return point
Lower limit
Time
Inventory Management
Components of Inventory – Raw materials – Work in process – Finished goods Goal = Minimize amount of cash tied up in inventory Carrying Costs - Costs of maintaining current assets, including opportunity cost of capital. Order cost times cost per order
财务管理PPT ch08 working capital management
Policy A B C Liquidity High Average Low Profitability Low Average High Risk Low Average High
1. Profitability varies inversely with liquidity. 2. Profitability moves together with risk. (risk and return go hand in hand!)
Return on Investment =
ASSET LEVEL ($) Policy A Policy B Policy C
Net Profit Total Assets Let Current Assets = (Cash + Rec. + Inv.) Return on Investment = Net Profit Current + Fixed Assets
8-4 Policy A Policy B Policy C
ASSET LEVEL ($)
Current Assets
0
25,000 OUTPUT (units)
50,000
Impact on Liquidity
Optimal Amount (Level) of Current Assets Liquidity Analysis Policy Liquidity A High B Average C Low Greater current asset levels generate more liquidity; all other factors held constant.
Corporate finance专业词汇手册
Chapter 1: introduction to corporate financeCorporate finance（financial management）：公司财务、公司金融、财务管理Capital budgeting：资本预算Capital structure：资本结构Working capital management：流动资本管理Sole proprietorship：独资制、单一业主制Partnership：合伙制Corporation：公司、股份公司Profit maximization ：利润最大化Agency relation：委托代理关系Agency problem：委托代理问题Managerial compensation：管理层报酬Corporate control：公司控制Primary market ：一级市场、发行市场Secondary market：二级市场、交易市场Chapter 2: financial statements, taxes and cash flow Financial statements: 财务报表Cash flow:现金流Accounting value:会计Net income：净利润Depreciation:折旧The balance sheet：资产负债表The income statement 损益表Current asset流动资产Fixed asset固定资产Inventory存货Current liabilities流动负债Bond债券Bondholder债券持有人Shareholder’s equity/common equity/owner’s equity股东权益Balance sheet identity资产负债表等式Net working capital 营运资本Capital spending:资本支出Liquidity：流动性Generally accepted accounting principles：公认会计准则Historical cost：历史成本The income statement：损益表Operating cash flow：经营现金流Earnings per share（EPS）每股收益Earnings before interest and taxes(EBIT):息税前利润Revenue ：收入Chapter 3: working with financial statementsShort-term solvency/liquidity ratios ：短期偿债能力、流动比率Long-term solvency/financial leverage ratios：长期偿债能力、财务杠杆比率Asset management or turnover ratios：资产周转比率Profitability ratios：盈利比率Market value ratios：市场价值比率Quick (acid-test ratio)：速动比率/酸性比率Debt-equity ratio：债务权益比Equity multiplier：权益乘数Long-term debt ratio：长期债务比率Inventory turnover：存货周转率Days’ sales in inventory：存货周转天数Receivables turnover ：应收账款周转率Days’ sales in receivables：应收账款周转天数Return on assets：资产报酬率Return on equity：权益报酬率Price-earning ratio ：市盈率Market-to-book ratio ：市净率Chapter 5 and chapter 6: discounted cash flow valuationtime value of money: 货币时间价值future value：终值compounding/interest on interest：复利/利滚利present value：现值discount rate：贴现率discounted cash flow (DCF) valuation：贴现现金流股价Annuities：年金Perpetuities：永续年金Preferred stock：优先股Common stock:普通股Interest-only loan：纯利息贷款Amortized loan：分期偿还贷款Chapter 7 and chapter 8: interest rates ,bond valuation and stock valuation Bond:债券Bond’s coupons：债券票面利息Face value/ par value：面值Par value bond：平价债券Bond’s time to maturity：债券到期Yield to maturity (YTM)：到期收益率Discount bond：折价债券Premium bond: 溢价债券Interest rate risk：利率风险Semiannual coupons：一年付息两次债券Zero coupon bond：零息债券Floating-rate bond：浮动利率债券Common stock:普通股The dividend growth model：股利增长模型Cumulative voting：累计投票Straight voting：直接选举Chapter 9: net present value and other investment criteria Net present value: 净现值Payback rule：回收期Discounted payback：折现回收期average accounting return：平均会计报酬率Internal rate of return：内部报酬率Mutually exclusive investments：互斥投资项目Profitability index：获利能力指数Chapter 10 and chapter 11:Making capital investment decisions and project analysis Incremental cash flows:增量现金流Sunk costs：沉没成本Opportunity costs：机会成本Side effects：副作用Financing costs：融资成本Scenario analysis：情境分析Sensitivity analysis：敏感性分析Simulation analysis：模拟分析Break-even analysis：盈亏分析Fixed costs：固定成本Variable costs：变动成本Average cost versus marginal cost：平均成本/边际成本Operating leverage：经营杠杆Financial leverage：财务杠杆Chapter 12 and chapter 13: risk and return Risk premium：风险溢价Variability of returns：报酬率的变动Standard deviation：标准差Variance：方差Normal distribution：正态分布Arithmetic averages：算术均值Geometric averages：几何均值Capital market efficiency：资本市场有效性The efficient markets hypothesis (EMH)：有效市场假说Weak form efficient：弱有效Semi strong form efficient：半强有效Strong form efficient：强有效Chapter 12: return, risk and the security market lineExpected portfolio returns：期望组合收益率Portfolio risk：组合风险Security market line：证券市场线Diversification：多元化Portfolio risk：组合风险Systematic risk：系统风险Unsystematic risk：非系统风险Capital asset pricing model (CAPM)Chapter 14: cost of capital Weighted average cost of capital (WACC)Cost of capital：资本成本Cost of equity：股权成本Risk-free rate：无风险收益率Market risk premium：市场风险溢价Flotation costs：发行成本Chapter 15: raising capitalVenture capital:风险资本Private equity：私募股权Public company/listed company：上市公司Go public：上市General cash offer：现金发行Rights offer：认股权发行/配股Initial public offering：首次公开发行Underwriter：承销商Chapter 16 and chapter 17: capital structure policy and dividend policy Bankruptcy costs ：破产成本Static theory of capital structure：资本结构静态权衡理论Pecking-order theory：啄食理论Cash dividend：现金股利Stock dividend ：股票股利Announcement date：宣告日Ex-dividend date：除息日Record date ：登记日Stock repurchase：股票回购Stock split：股票分拆。
武汉大学公司金融课件(一)
A FRAMEWORK OF CORPORATE FINANCEThe goal of financial management: to maximize the shareholders’ wealth.Three questions:1.What should the company invest (so as to earn good returns)?2.What is the lowest cost to get money (borrow or issue equity) in order to invest?3.How much cash needed to keep the company running?Work Map.Assets (investment):1.EvaluationCompounding & discountingBond valuationStock valuation2. Capital BudgetingPaybackNet present valueInternal rate of return3. Return & riskCapital market efficiency(SML)Expected returns and varianceRisks: systematic & unsystematic (Betacoefficient)Diversification & portfolios4. Financial StatementCashflowRatio analysisFinancial PlanningLiabilities & equity1.Cost of capitalCost of long-term debtFlotation costsCapital structureWeighted average cost of capital(WACC)2.Financial Leverage & capital structureModigliani & Miller Proposition I & IITrade-off theoryPecking order theory3.Raising CapitalCash offer, rights offer, private placementCash & stock dividendsWarrantsConvertible BondsThe dividend policy controversyFinancial leasing4.Merger & AcquisitionsEstimating gains and lossesLeveraged buy-outsBootsWorking capital management(e.g. p3 )From the balance-sheet, we can see net working capital is defined as current assets minus current liabilities. This part covers the topic of how to manage the gaps between cash inflows and outflows in order to keep the business running.1.Operating and cash cycles2.Cash budgeting3.Flexible & restrictive strategiesTIME V ALUE OF MONEYBASIC PRINCIPLE:A dollar today is worth more than a dollar tomorrow.WHY?COMPOUNDING: FUTURE VALUE▪Borrow---$500 for one year▪Interest rate per year--- 9%FV1 = $500 + (.09)(500) = $545FV1 = $500 * ( 1 + .09)FV1 = $500 ( 1 + r)$500 is the principal$45 is the simple interestCOMPOUNDING: MULTIPLE YEARS▪Borrow--- $500 for two yearsFV1 = 500 ( 1 + r)FV2 = FV1 ( 1 + r)= 500 ( 1 + r)( 1 + r) = 500 ( 1 + r )2FV2 = 500 ( 1.09)2 = 500 ( 1.1881 )FV2 = $594.05Principal---$500.00Total interest---$ 94.05Simple interest--- $45 + $45 = $90Compound interest = $4.05(Interest on interest)(.09)($45) = $4.05Generally:FV t = Principal * ( 1 + r )tFUTURE V ALUE INTERESTFACTOR = ( 1 + r )tNotation:FVIF(r,t)The future value interest factor at an interest rate of r over tperiods.DETERMINING THE FUTURE VALUE OF THE INVESTMENT OR DEBTYou run your credit card to the limit of $3,000. The interest rate is 1.75% permonth. How much will you owe at the end of 12 months?POWER OF COMPOUNDINGAbout 374 years ago, Manhattan Island was sold for $24. What would be the value today (the Future Value) if that money had been invested at a compound interest rate of 5% per year?DISCOUNTING: PRESENT VALUEPresent Value: value today of a futurecash flow at an appropriatediscount (interest) rate.▪You will receive a scholarship of $1,000 one year from now.▪7% interest rateThe Present Value ($934.58) is today’s value of $1,000 to be received in one year’s time.Given the opportunity cost created by the 7% interest rate, a value of a future dollar has to be discounted to be comparable to a current dollar.DISCOUNTING: MULTIPLE YEARSFV t = PV * ( 1 + r )tPV = FV t / ( 1 + r )tPV = FV t * 1/(1 + r)t▪You will receive the $1,000 scholarship in three years---what is its value today. Generally:PV = FV t * 1/( 1 + r )tPRESENT V ALUE INTERESTFACTOR = 1/( 1 + r )tNotation:PVIF(r,t)The present value interest factor at a discount rate of r over tperiods.DETERMINING THE PRESENT VALUEYou buy a type of bond called a “strip bond” with a future value of $250,000 foryour retirement 35 years from now. The current interest rate (discount rate) is7.5%. How much will you pay for the strip bond?Overview:PV = FV t * 1/( 1 + r )tFV t = PV * ( 1 + r )tFour factors:▪Present value (PV)▪Future value (FV t)▪Discount rate (r)▪Life of the investment (t)Given any 3 of the factors, you can always determine the 4th.DETERMINING THE DISCOUNT RATE▪If you give me $4,000 today, I will give you $5,000 in three years. What rate of interest will you earn with this investment, if interest is compounded annually?You will earn about 7.72% per year with this opportunity.EXAMPLE: DETERMINING THE DISCOUNT RATEYou are still trying to buy the $250,000 strip bond coming due in 35 years. Your broker states that you must pay $21,000. What interest rate will you earn over the 35 years if you pay this price, if interest is compounded annually?EXAMPLE: DETERMINING THE LIFE OF THE INVESTMENTYou have $2,000 set aside in a savings account earning ½ of 1% interest per month, compounded monthly. When you hav e $3,000, you’re off to Mexico to lie in the sun. How many months must you wait?MULTIPLE CASH FLOWSUse our basic compounding and discounting techniques to determine the present or future value of a series of uneven payments, over a number of compounding periods.Understand the importance of the timing of payments.Calculated the present and future values of streams of cash payments, where the payments are all the same amounts, e.g., annuities, loan payments, or perpetuities.Compare interest rates to determine which are the highest and which are the lowest.Illustrate how interest rates can be quoted in different and often deceptive ways. FVIF(r,t) = (1 + r)t PVIF(r,t) = 1/(1 + r)tFUTURE VALUEThe Value at 10th year from now(i) One year at a time at a 7% discount rateEnd ofYear 1 Year 2 Year 3 Year 4750 800 700 900*1.07= 802.501,602.50*1.07= 1,714.682,414.68*1.07=2,583.713,483.71FV4 = $3,483.71FV10 = $3,483.71 * FVIF7%,6FV10 = $5,228.11(ii)Each cash flow separately at a 7% discount rateEnd ofYear 1 Year 2 Year 3 Year 4750 800 700 900750 * FVIF7%,3 = 918.78800 * FVIF7%,2= 915.92700 * FVIF7%,1= 749.00FV4= 3,483.70FV10 = $3,483.71 * FVIF7%,6FV10 = $5,228.11PRESENT VALUE(i)One Year at a time at a 7% discount rateEnd of0 Year 1 Year 2 Year 3 Year 4750 800 700 900/1.07841.121,541.12 /1.071,440.302,240.30/1.072,093.742,843.74 /1.072,657.70PV = $2,657.70(ii)Each cash flow separately at a 7% discount rateEnd of0 Year 1 Year 2 Year 3 Year 4 750 800 700 900750 * PVIF7%,1= 700.93800 * PVIF7%,2= 698.75700 * PVIF7%,3= 571.41900 * PVIF7%,4= 686.61PV = $2,657.70EXAMPLEYou have just received your first job offer from a large investment banking firm. They want to test your skills and have offered you either a $200,000 signing bonus with no salary for 4 years or a $60,000 salary at the end of each year for 4 years.Ignoring taxes, which would you prefer if you could earn 9% on investments?PV bonus = $200,000PV sal = (60,000 *PVIF9%,1)+ (60,000*PVIF9%,2)+(60,000 *PVIF9%,3) + (60,000 * PVIF9%,4)= (60,000 * .91743) + (60,000 * .84168) + (60,000 * .77218) + (60,000 * .70843)= 55,046 + 50,501 + 46,331 + 42,506 == $194,384The signing bonus of $200,000 has a greater present value.IMPORTANT: TIMING OF PAYMENTSAll preset calculations assume that payments occur at the end of each period.In our example, the assumption is that the annual salary occurs at the end of each year.Since many payments, such as rent payments, occur at the beginning of a period it is very important to pay attention to the timing of the payments…ANNUITIES :a level stream of cash payments for a fixed period of time.Examples:▪Car loans▪Mortgages▪Rent payments▪Fixed costs▪Pension paymentPresent Value of = C * 1 – PVIFan Annuity rPV A (r,t)= C * 1 - (1/( 1 + r )t)rNotationPVIFA(r,t)= 1 - 1/( 1 + r )trPREVIOUS EXAMPLESalary of $60,000 per year for 4 years with a 9% discount rate.PV A (9%,4) = 60,000 * ( 1 – (1/(1.09)4).09= 60,000 * 3.23972PV A = $194,383.19Three Methods:compute the equationuse present value of an annuity tableuse PV function on a business calculatorEXAMPLE:You win the “million dollar” lottery but find that you will receive $50,000 per year for 20 years.You could earn 7.5% on an investment.What is the present value of your winnings?EXAMPLE: CALCULATING THEMONTHL Y PAYMENTYou’ve grad uated, have a new job, and have the student loan paid off.Now, the fine car! Used but fine.Price: $37,500Interest rate: 1% compounded monthlyTerm: 60 monthsWHAT WILL YOUR MONTHL Y PAYMENT BE?EXAMPLE: CALCULATING THEINTEREST RATE ON ANANNUITYMore on the carPrice: $37,500Term: 60 months; compounded monthlyPayment per month; $950WHAT MONTHL Y INTEREST RA TE WILL YOU BE PAYING?FUTURE VALUE OF AN ANNUITYFV A(r,t) = PV A * FVIF(r,t)ORFV A(r,t) = C * FVIF – 1rFVA(r,t) = C * (1 + r)t –1rNotationFVIFA(r,t) = (1 + r)t –1rEXAMPLEYou won $50,000 per year for 20 years. You can earn 7.5% per year on an investment. We showed earlier that the Present Value is $509,724.57.What is the Future Value of this Annuity?EXAMPLEYou set aside $3,500 per year for 40 years in an RRSP in preparation for your retirement. If you earn 7.32% per annum, what is the future value of this constant stream of contributions? PERPETUITYAn annuity in which the cash flow continues forever.PVIFA = 1 – 1/(1 + r)tr-if t becomes very large, then 1/(1+r)tapproaches zeroSo: PVIFA perpetuity = 1/rPV perpetuity = C * 1/r = C/rEXAMPLEA preferred stock has a $7.50 dividend in perpetuity and the interest rate is 6.9%. What is the value of the preferred stock?PV perpetuity = C/r = 7.50/.069Price of the preferred stock = $108.70。
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20- 13
Credit Analysis
Credit analysis is only worth while if the expected savings exceed the cost.
Don’t
undertake a full credit analysis unless the order is big enough to justify it. Undertake a full credit analysis for the doubtful orders only.
20- 2
Topics Covered
Accounts Receivable and Credit Policy Credit Agreements Inventory Management Cash Management Investing Idle Cash: The Money Market
Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved
Z = 3.3
+ 1.4
McGraw-Hill/Irwin
20- 11
Credit Analysis
Example - If the Altman Z score cut off for a credit worthy business is 2.7 or higher, would we accept the following client?
McGraw-Hill/Irwin
Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved
20- 10
Credit Analysis
Multiple Discriminant Analysis - A technique used to develop a measurement of solvency, sometimes called a Z Score. Edward Altman developed a Z Score formula that was able to identify bankrupt firms approximately 95% of the time.
EBIT .12 total assets sales 1. 4 total assets market equity .9 book debt
McGraw-Hill/Irwin
Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved
Firm' s Z Score (3 .3x. 12) + (. 1 0x1 .4) + (.6x.9) + (. 1 4 x.4) + (. 1 2 x. 12) = 3 .04
A score above 2.7 indicates good credit.
McGraw-Hill/Irwin
Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved
Payoff = Rev - Cost
Customer pays = p
Offer credit Customer defaults = 1-p
Payoff = - Cost
Refuse credit
Payoff = 0
McGraw-Hill/Irwin
Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved
Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved
20- 8
Credit Analysis
Credit Analysis - Procedure to determine the likelihood a customer will pay its bills. Credit agencies, such as Dun & Bradstreet provide reports on the credit worthiness of a potential customer. Financial ratios can be calculated to help determine a customer’s ability to pay its bills.
20- 6
Terms of Sale
Example - On a $100 sale, with terms 5/10 net 60, what is the implied interest rate on the credit given?
Effective annual rate 1+ 1 +
Fundamentals of Corporate Finance
Fifth Edig Capital Management
Slides by
Matthew Will
McGraw-Hill/Irwin
Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved
McGraw-Hill/Irwin
365/extra days credit discount discounted price 5 365/50 95
-1
- 1 = .454, or 45.4%
Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved
McGraw-Hill/Irwin
Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved
20- 15
The Credit Decision
The credit decision and its probable payoffs
20- 7
Credit Agreements
Terminology
open
account promissory note commercial draft sight draft time draft trade acceptance banker’s acceptance
McGraw-Hill/Irwin
McGraw-Hill/Irwin
Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved
20- 14
The Credit Decision
Credit Policy - Standards set to determine the amount and nature of credit to extend to customers. Credit Scoring – What your lender won’t tell tell you. Extending credit gives you the probability of making a profit, not the guarantee. There is still a chance of default. Denying credit guarantees neither profit or loss.
McGraw-Hill/Irwin
Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved
20- 3
A/R and Credit Policy
Credit Management Steps
Establish
terms of sale What form of IOU will you require? Perform a credit analysis Create a credit policy Develop a collection policy
McGraw-Hill/Irwin
Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved
20- 5
Terms of Sale
A firm that buys on credit is in effect borrowing from its supplier. It saves cash today but will have to pay later. This, of course, is an implicit loan from the supplier. We can calculate the implicit cost of this loan
McGraw-Hill/Irwin
Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved
20- 4
Terms of Sale
Terms of Sale - Credit, discount, and payment terms offered on a sale. Example - 5/10 net 30 5 - percent discount for early payment 10 - number of days that the discount is available net 30 - number of days before payment is due