Receivables Management – NBC Institute

FM – Nov 2020 – L2 – Q5a – Management of receivables and payables

Compare the costs of factoring vs. bank financing for receivables management and advise on the best option.

Question

Pee Ltd has been factoring its debtors for the past 5 years. The factor charges a fee of 2% and will lend up to 80% of the volume of debtors purchases for an additional ¾% per month. The firm typically has sales of GH¢500,000 per month, 70% of which are on credit. By using the factor, two savings are effected:

GH¢2,000 per month that would be required to support a credit department, and
A bad-debt expense of 1% on credit sales.

Pee Ltd’s bank has recently offered to lend it up to 80% of the face value of the debtors shown on the schedule of accounts. The bank would charge 8% per annum interest plus a 2% processing charge per GH¢1 of debtors lending. The firm extends terms of net 30, and all customers who pay their bills do so by the thirtieth of the month.

Required:

If the firm borrows on the average GH¢100,000 per month on its debtors, advise whether the firm should discontinue its factoring arrangement in favor of the bank’s offer.

Answer

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Tags: Bank financing, Cost comparison, Factoring, Receivables Management
Level: Level 2

Topic: Management of receivables and payables
Series: NOV 2020

FM – May 2020 – L2 – Q5b – Working Capital Management

Evaluate the impact of introducing credit sales on total profit before tax for a company and provide management advice.

Question

Innovate Ghana Ltd is a dealer in household consumables in Ghana. It currently sells on a cash-only basis. The company’s current annual sales are GH¢10 million. The operating cost structure is as follows:

Cost of sales: 55% of sales
Staff cost: 10% of sales
Marketing and distribution cost: 15% of sales

Management in a meeting concluded that introducing credit sales will help boost sales in the light of the current tightness in liquidity in the market, the drive by other competitors, and pressure from the sales team.

It is projected that total sales will grow by 50% solely from the credit sales. The customers are offered 1-month credit, and a new credit department is set up to assess and monitor these credit sales. The monthly cost of running this credit department is GH¢20,000, and bad debts are expected to be 4% of the credit sales.

To finance this credit, Innovate Ghana Ltd will borrow at an interest rate of 25% per annum.

Required:

i) Calculate the total profit before tax before the introduction of the new policy.
(4 marks)

ii) Calculate the total profit before tax after the introduction of the new policy.
(6 marks)

iii) Advise management whether the initiative should be undertaken.
(3 marks)

Answer

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Tags: Credit Policy, Profitability analysis, Receivables Management, Working Capital Management
Level: Level 2

Topic: Working Capital Management
Series: MAY 2020

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

FM – April 2022 – L2 – Q5a – Management of receivables and payables

Evaluate the impact of a proposed change in credit policy on Poh-Poh Electronics Ltd’s profitability and recommend whether the policy should be implemented, along with advice on procedures for receivables collection.

Question

Poh-Poh Electronics Ltd is a wholesale distributor of household electrical products of major electronic brands. The company currently sells on credit to all its customers. Although the credit term is net 20 days, the receivables turnover days have been 15 days. The company’s annual credit sales revenue is GH¢80 million, and its contribution margin ratio is 30%. Bad debt is 2% of sales revenue, and credit collection cost is GH¢50,000 per annum.

Management is considering extending the credit period to net 30 days. It is expected that the implementation of this proposal would attract new customers, and the annual revenue would increase by 20%. It is also expected that both the existing and the new customers will probably take the full 30 days credit. To mitigate the probable lengthening in the receivables turnover days, management proposes that the extension in the credit period be combined with the introduction of a cash discount policy of 2% on all payments made within the first 10 days of the credit period. It is expected that 30% of all customers will pay their accounts early to take the discount. Consequently, the receivables turnover days would increase to 24 days. While the bad debt will remain at 2% of sales revenue, the annual credit collection cost will increase to GH¢65,000.

The company’s cost of capital is 24%.

Required:
i) Evaluate the proposed change in the credit policy and recommend whether the proposed change should be implemented. (9 marks)
ii) Advise the management team on THREE (3) procedures for the collection of its receivables. (6 marks)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Cash discount policy, Contribution margin, Cost of Capital, Credit Policy, Receivables Management
Level: Level 2

Topic: Management of receivables and payables
Series: APR 2022

FM – Nov 2020 – L2 – Q5a – Management of receivables and payables

Compare the costs of factoring vs. bank financing for receivables management and advise on the best option.

Question

GH¢2,000 per month that would be required to support a credit department, and
A bad-debt expense of 1% on credit sales.

Required:

If the firm borrows on the average GH¢100,000 per month on its debtors, advise whether the firm should discontinue its factoring arrangement in favor of the bank’s offer.

Answer

Find Related Questions by Tags, levels, etc.

Tags: Bank financing, Cost comparison, Factoring, Receivables Management
Level: Level 2

Topic: Management of receivables and payables
Series: NOV 2020

FM – May 2020 – L2 – Q5b – Working Capital Management

Evaluate the impact of introducing credit sales on total profit before tax for a company and provide management advice.

Question

Cost of sales: 55% of sales
Staff cost: 10% of sales
Marketing and distribution cost: 15% of sales

To finance this credit, Innovate Ghana Ltd will borrow at an interest rate of 25% per annum.

Required:

i) Calculate the total profit before tax before the introduction of the new policy.
(4 marks)

ii) Calculate the total profit before tax after the introduction of the new policy.
(6 marks)

iii) Advise management whether the initiative should be undertaken.
(3 marks)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Credit Policy, Profitability analysis, Receivables Management, Working Capital Management
Level: Level 2

Topic: Working Capital Management
Series: MAY 2020

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

FM – April 2022 – L2 – Q5a – Management of receivables and payables

Evaluate the impact of a proposed change in credit policy on Poh-Poh Electronics Ltd’s profitability and recommend whether the policy should be implemented, along with advice on procedures for receivables collection.

Question

The company’s cost of capital is 24%.

Answer

Find Related Questions by Tags, levels, etc.

Tags: Cash discount policy, Contribution margin, Cost of Capital, Credit Policy, Receivables Management
Level: Level 2

Topic: Management of receivables and payables
Series: APR 2022

Question Tag: Receivables Management

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FM – Nov 2020 – L2 – Q5a – Management of receivables and payables

Compare the costs of factoring vs. bank financing for receivables management and advise on the best option.

FM – May 2020 – L2 – Q5b – Working Capital Management

Evaluate the impact of introducing credit sales on total profit before tax for a company and provide management advice.

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.

FM – April 2022 – L2 – Q5a – Management of receivables and payables

Evaluate the impact of a proposed change in credit policy on Poh-Poh Electronics Ltd’s profitability and recommend whether the policy should be implemented, along with advice on procedures for receivables collection.

FM – Nov 2020 – L2 – Q5a – Management of receivables and payables

Compare the costs of factoring vs. bank financing for receivables management and advise on the best option.

FM – May 2020 – L2 – Q5b – Working Capital Management

Evaluate the impact of introducing credit sales on total profit before tax for a company and provide management advice.

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.

FM – April 2022 – L2 – Q5a – Management of receivables and payables

Evaluate the impact of a proposed change in credit policy on Poh-Poh Electronics Ltd’s profitability and recommend whether the policy should be implemented, along with advice on procedures for receivables collection.

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FM – Nov 2020 – L2 – Q5a – Management of receivables and payables

Compare the costs of factoring vs. bank financing for receivables management and advise on the best option.

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FM – May 2020 – L2 – Q5b – Working Capital Management

Evaluate the impact of introducing credit sales on total profit before tax for a company and provide management advice.

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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"

FM – April 2022 – L2 – Q5a – Management of receivables and payables

Evaluate the impact of a proposed change in credit policy on Poh-Poh Electronics Ltd’s profitability and recommend whether the policy should be implemented, along with advice on procedures for receivables collection.

You're reporting an error for "FM – April 2022 – L2 – Q5a – Management of receivables and payables"

FM – Nov 2020 – L2 – Q5a – Management of receivables and payables

Compare the costs of factoring vs. bank financing for receivables management and advise on the best option.

You're reporting an error for "FM – Nov 2020 – L2 – Q5a – Management of receivables and payables"

FM – May 2020 – L2 – Q5b – Working Capital Management

Evaluate the impact of introducing credit sales on total profit before tax for a company and provide management advice.

You're reporting an error for "FM – May 2020 – L2 – Q5b – Working Capital Management"

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"

FM – April 2022 – L2 – Q5a – Management of receivables and payables

Evaluate the impact of a proposed change in credit policy on Poh-Poh Electronics Ltd’s profitability and recommend whether the policy should be implemented, along with advice on procedures for receivables collection.

You're reporting an error for "FM – April 2022 – L2 – Q5a – Management of receivables and payables"

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