Working Capital Management

Working Capital Management (WMC)

Credit Standards & Credit Terms

We may take following approach in assessing the effects of lowering down the credit standards:

  • Determine find out the profitability of additional sales
  • Determine increase in bad debt losses, collection expenses,Credit Repair and any other cost arising from relaxing the standards
  • Determine increase slowness of the average collection period and additional amount of investment required in accounts receivable and multiply it by the required rate of return on investment in accounts receivable.

Credit Terms

The other important dimension of accounts receivable management is to decide the terms of credit in advance. Sometimes Credit Repair Service helps to decide credit terms. The decision about the credit terms would involve the decision about the following variables:

  1. Credit Period
  2. Credit Limit
  3. Cash Discount
  4. Discount rate and Discount Period

Credit Period

Credit period is the time for which the company is willing to allow their customers not to pay their bills. By the end of the credit period the company expects that the customers would pay their bills. At any point of time there would be customers who may be interested in a longer credit period. If the company liberalizes its credit period the company may be able to attract such customers. But at the same time the extension of credit period means more investment in accounts receivable. Extension of credit sometime gives time forBad Credit Repair.

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July 11, 2008 - Posted by | Assets, Business Flow, Capital, Current Assets, Working Capital, Working Capital Management | , , , ,

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