this is an introduction to current assets management, includes calculations for the impact of change in credit policy, the use of the economic order model, cash management as well financing of current assets
Current asset management (LA 7)
Means 2% discount if paid within 10 days,
Credit policy
otherwise should pay full amount within
Example 2/10 net 30
30 days
Impact of change in credit policy
Impact = change in GP +/- opportunity cost in incremental investment in accounts receivable
+/- cost of marginal debt (bad debts) +/- cost of discount
Do we use + or -? If the cost is
reduced then it’s a + as this is a
cost saving (e.g decrease in bad
debts would be a +). If the cost is
increased then it’s a – (e.g
increase in cost of discount)
Step 1: change in GP
(New sales – current sales) * GP%
Step 2: +/- opportunity cost in incremental investment in accounts receivable
➢ Incremental investment relating to existing sales (x)
NB! Use debtors’ collection period not credit terms
(Refer to Q 12.23 to see how to calculate debtors days when given credit terms)
First get the change in debtors’ days. From 40 to 30 days would be a +10, from 30 to 40 days
would be -10.
➢ Incremental investment relating to new sales (y)
𝑛𝑒𝑤 𝑑𝑒𝑏𝑡𝑜𝑟𝑠 𝑑𝑎𝑦𝑠
∗ (100 − 𝐺𝑃%) ∗ (𝑛𝑒𝑤 𝑠𝑎𝑙𝑒𝑠 − 𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑠𝑎𝑙𝑒𝑠)
𝑛𝑟. 𝑜𝑓 𝑑𝑎𝑦𝑠 𝑝𝑒𝑟 𝑎𝑛𝑛𝑢𝑚
Put the above formulae together: x + y which is the total incremental investment
Opportunity cost = (x+y) * opportunity cost %
Step 3: +/- cost of marginal debt (bad debts)
Example: Bad debts under existing policy = R240 mil*30%*2%* = R1440 000
Bad debts under new policy = R270*40%*3% =R2160 000
Change = -R720 000 Increase in cost
Note: for the above calculations, read carefully “bad debts are 2% of sales for which discount is not
taken” or “bad debts are 2% of total sales”
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