By Robet Hill
This booklet seriously evaluates operating capital administration and the strategic advertising functionality of credits phrases inside a theoretical context of wealth maximisation and empirical learn. The accounting conference that administration needs to current a picture of solvency and liquidity to the surface global via preserving an far more than present resources over present liabilities is heavily wondered. A firm’s targets may be to minimise present resources and maximise present liabilities appropriate with its debt paying skill, dependent upon destiny funds profitability dictated by way of optimal phrases of sale, that could be exact.
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Extra info for Working Capital and Strategic Debtor Management
Your intention was to exploit a gap in the market by importing specialist music CD boxed sets to the UK mainland from the UK Channel Islands, in order to avoid tax (which is quite legal). At the beginning of each month, you acquired inventory of £5000 on three months credit. At the end of each month it was sold for cash. Your profit margin was 50 per cent on cost. Cash inflows from sales were not withdrawn. They were utilised to finance fixed asset investment (the purchase of business premises) at the beginning of each following month, compatible with your debt paying ability, to expand the subsequent year’s operations.
Even in the corporate sector, at best they may have an interim report. Alternatively, they will only have access to a Balance Sheet on the date it is drawn up (“struck”) at the year’s end as a basis for interpretation (say July 1st in our example). Secondly, without access to further managerial (insider) information that the terms of trade remained the same throughout the period: -- Inventory was acquired on three months credit and sold for cash at the end of each month. -- Cash from sales was not withdrawn but utilised to finance fixed asset investment at the beginning of the following month.
4 The Decision to Discount Because (P") differs from (P') we now understand that under the conditions stated, the introduction of any cash discount into a firm’s terms of sale will influence the demand for its product and working capital requirements. So, when formulating credit policy, management must consider the division of sales between discounting and non-discounting customers. For any combination of credit policy variables, the buyer’s decision to discount depends upon the cost of not taking it exceeding the benefit.
Working Capital and Strategic Debtor Management by Robet Hill