Credit terms – NBC Institute

PM – Nov 2024 – L2 – Q5 – Risk Management

Financial evaluation and credit terms review for a new customer order in Vena Plc.

Question

Vena Plc. manufactures engineering equipment. The company has received an order from a new customer for 5 machines at N5,000,000 each. Vena Plc.’s terms of sale are 10 percent of the sales value payable with order. The deposit has been received from the new customer. The balance is payable 12 months after acceptance of the order by Vena Plc.

Vena Plc.’s past experience has been that only 60 percent of similar customers pay within 12 months. Customers who do not pay within 12 months are referred to a debt collection agency to pursue the debt. The agency has in the past had a 50 percent success rate of obtaining immediate payment once they became involved. When they are unsuccessful, the debt is written off by Vena Plc. The agency’s fee is N500,000 per order, payable by Vena Plc. with the request for service. This fee is not refundable if the debt is not recovered.

You are an accountant in Vena Plc.’s credit control department, and based on the company’s past experience and discussions with the sales and credit managers, you do not expect the pattern of payment and collection to change.

Incremental costs associated with the new customer’s order are expected to be N3,600,000 per machine; 70 percent of these costs are for materials and are incurred shortly after the order has been accepted. The remaining 30 percent is for all other costs, which you can assume are paid shortly before delivery in 12 months’ time. The company is not presently operating at full production capacity.

A credit bureau has offered to provide an error-free credit information about the new customer if the price is right.

Vena Plc.’s opportunity cost of capital is 16 percent. Ignore taxation.

Required:

a. Write a report to the Credit Control Manager evaluating, from a purely financial point of view, whether Vena Plc. should accept the order from the new customer based on the information provided. (12 Marks)

b. Comment on what other factors should be considered before a decision to grant credit is taken. (3 marks)

Answer

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Tags: Credit Evaluation, Credit terms, Opportunity Cost, Payment Collection, Risk Assessment
Level: Level 2

Topic: Risk Management

AFM – Nov 2017 – L3 – Q4b – Trading and planning in a multinational environment

Draft memorandum setting out key points for opening an export business, including pricing, risks, credit terms, and market representation.

Question

A company manufacturing specialized electronic equipment has so far sold only inside the country where it is established. It has considerable surplus capacity, and the Chairman has asked you, as his Finance Director, to prepare a draft memorandum for the board on his proposal to open up export business to a number of countries.

Required:
Draft this memorandum, setting out the main points that would need to be considered before arriving at a final decision, under the following headings:

i) Export pricing and profitability
ii) Credit terms and methods of obtaining payment
iii) Risks and methods of avoiding them
iv) Forms of representation or local organization in export markets.

Answer

Find Related Questions by Tags, levels, etc.

Tags: Credit terms, Export market representation, Export pricing, Export risks
Level: Level 3

Topic: Trading and planning in a multinational environment
Series: NOV 2017

FM – March 2023 – L2 – Q5a – Management of receivables and payables | Working Capital Management

Evaluate the net benefit or cost associated with the proposed change in Kanzo Food Stores Plc’s credit terms and recommend whether it should be adopted.

Question

Kanzo Food Stores Plc (Kanzo) sells on credit terms of net 60 days. Kanzo’s new Chief Finance Officer (CFO) thinks that the company’s credit terms are too lengthy considering the industry average credit terms of net 45 days.

Kanzo’s annual credit sales revenue is GH¢500 million, and its receivables turnover days are 55 days. The CFO has proposed that the credit terms be revised to net 45 days. Although the tightening of the credit terms would cause annual sales revenue to drop by an estimated GH¢20 million, the CFO believes that the policy change would lower the receivables turnover days to 40 days, which would bring some savings on investment in accounts receivables.

Kanzo has a variable cost ratio of 65% and a cost of capital of 20%.

Required:
i) Compute the net benefit/cost associated with the proposed change in the credit terms and recommend whether the proposed change in the credit terms should be adopted. (10 marks)
ii) The CFO is considering investing funds that would be released from trade receivables in short-term marketable securities. Explain TWO (2) characteristics of marketable securities. (5 marks)

Answer

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Tags: Cost of Capital, Credit terms, Investment in receivables, Receivables Management, Working Capital
Level: Level 2

Topic: Management of receivables and payables, Working Capital Management
Series: MAR 2023

PM – Nov 2024 – L2 – Q5 – Risk Management

Financial evaluation and credit terms review for a new customer order in Vena Plc.

Question

A credit bureau has offered to provide an error-free credit information about the new customer if the price is right.

Vena Plc.’s opportunity cost of capital is 16 percent. Ignore taxation.

Required:

b. Comment on what other factors should be considered before a decision to grant credit is taken. (3 marks)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Credit Evaluation, Credit terms, Opportunity Cost, Payment Collection, Risk Assessment
Level: Level 2

Topic: Risk Management

AFM – Nov 2017 – L3 – Q4b – Trading and planning in a multinational environment

Draft memorandum setting out key points for opening an export business, including pricing, risks, credit terms, and market representation.

Question

Required:
Draft this memorandum, setting out the main points that would need to be considered before arriving at a final decision, under the following headings:

i) Export pricing and profitability
ii) Credit terms and methods of obtaining payment
iii) Risks and methods of avoiding them
iv) Forms of representation or local organization in export markets.

Answer

Find Related Questions by Tags, levels, etc.

Tags: Credit terms, Export market representation, Export pricing, Export risks
Level: Level 3

Topic: Trading and planning in a multinational environment
Series: NOV 2017

FM – March 2023 – L2 – Q5a – Management of receivables and payables | Working Capital Management

Evaluate the net benefit or cost associated with the proposed change in Kanzo Food Stores Plc’s credit terms and recommend whether it should be adopted.

Question

Kanzo has a variable cost ratio of 65% and a cost of capital of 20%.

Answer

Find Related Questions by Tags, levels, etc.

Tags: Cost of Capital, Credit terms, Investment in receivables, Receivables Management, Working Capital
Level: Level 2

Topic: Management of receivables and payables, Working Capital Management
Series: MAR 2023

Question Tag: Credit terms

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PM – Nov 2024 – L2 – Q5 – Risk Management

Financial evaluation and credit terms review for a new customer order in Vena Plc.

AFM – Nov 2017 – L3 – Q4b – Trading and planning in a multinational environment

Draft memorandum setting out key points for opening an export business, including pricing, risks, credit terms, and market representation.

FM – March 2023 – L2 – Q5a – Management of receivables and payables | Working Capital Management

Evaluate the net benefit or cost associated with the proposed change in Kanzo Food Stores Plc’s credit terms and recommend whether it should be adopted.

PM – Nov 2024 – L2 – Q5 – Risk Management

Financial evaluation and credit terms review for a new customer order in Vena Plc.

AFM – Nov 2017 – L3 – Q4b – Trading and planning in a multinational environment

Draft memorandum setting out key points for opening an export business, including pricing, risks, credit terms, and market representation.

FM – March 2023 – L2 – Q5a – Management of receivables and payables | Working Capital Management

Evaluate the net benefit or cost associated with the proposed change in Kanzo Food Stores Plc’s credit terms and recommend whether it should be adopted.

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PM – Nov 2024 – L2 – Q5 – Risk Management

Financial evaluation and credit terms review for a new customer order in Vena Plc.

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AFM – Nov 2017 – L3 – Q4b – Trading and planning in a multinational environment

Draft memorandum setting out key points for opening an export business, including pricing, risks, credit terms, and market representation.

You're reporting an error for "AFM – Nov 2017 – L3 – Q4b – Trading and planning in a multinational environment"

FM – March 2023 – L2 – Q5a – Management of receivables and payables | Working Capital Management

Evaluate the net benefit or cost associated with the proposed change in Kanzo Food Stores Plc’s credit terms and recommend whether it should be adopted.

You're reporting an error for "FM – March 2023 – L2 – Q5a – Management of receivables and payables | Working Capital Management"

PM – Nov 2024 – L2 – Q5 – Risk Management

Financial evaluation and credit terms review for a new customer order in Vena Plc.

You're reporting an error for "PM – Nov 2024 – L2 – Q5 – Risk Management"

AFM – Nov 2017 – L3 – Q4b – Trading and planning in a multinational environment

Draft memorandum setting out key points for opening an export business, including pricing, risks, credit terms, and market representation.

You're reporting an error for "AFM – Nov 2017 – L3 – Q4b – Trading and planning in a multinational environment"

FM – March 2023 – L2 – Q5a – Management of receivables and payables | Working Capital Management

Evaluate the net benefit or cost associated with the proposed change in Kanzo Food Stores Plc’s credit terms and recommend whether it should be adopted.

You're reporting an error for "FM – March 2023 – L2 – Q5a – Management of receivables and payables | Working Capital Management"

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