Chapter 8 Managing Working Capital

Required:

(a) calculate the receivables days for Paisley

(b) calculate the annual cost of financing receivables.


Solution:

(a) Receivables days = $4m ÷ $20m × 365 = 73 days

(b) Cost of financing receivables = $4m × 12% = $480,000.



3.2 Assessing creditworthiness

3.2.1 A firm should assess the creditworthiness of:

(a) all new customers immediately
(b) existing customers periodically.
3.2.2 Credit control involves the initial investigation of potential customers and continuing control of outstanding accounts. The main points to note are as follows:
(a) New customers should give good references, including one from a bank, before being granted credit, or credit reference agencies such as Dunn & Bradstreet publish general financial details of many companies, together with a credit rating.
(b) Credit ratings might be checked through a credit rating agency.
(c) A new customer’s credit limit should be fixed at a low level and only increased if his payment record subsequently warrants it.
(d) For large value customers, a file should be maintained of any available financial information about the customer. This file should be reviewed regularly. Information is available from, for example, an analysis of the company’s annual report and accounts.
(e) Press comments may give information about what a company is currently doing.
(f) The company could send a member of staff to visit the company concerned, to get a first-hand impression of the company and its prospects. This would be advisable in the case of a prospective major customer.


3.3 Credit policy

3.3.1