This lesson examines the management of accounts receivable, exploring the trade-off between sales growth and the cost of extending credit. It covers credit policy, credit analysis, collection strategies, and performance monitoring.

• Accounts Receivable and Credit Management: Accounts receivable represent money owed to a firm by customers for goods or services delivered on credit. A comprehensive credit management system includes:

  • Credit Policy: Setting clear terms for extending credit.

  • Credit Analysis: Assessing the creditworthiness of potential customers .

  • Collections: Managing the timely collection of outstanding receivables .

• Setting Credit Policy and Terms: The credit policy defines the criteria for granting credit and the payment terms offered to customers. The credit manager is responsible for monitoring and control of accounts receivable and credit policy decisions . The marketing manager also influences credit policy decisions .

• Collection Strategies and Monitoring: Effective collection practices are essential for maintaining a healthy cash flow. The process involves implementing effective collection practices, monitoring receivables, and applying an Expected Credit Loss provision for potential bad debts . Key tools include detailed aging analysis and key receivables ratios.

• Benefits and Costs of Extending Credit: Extending credit can boost sales, enhance customer relationships, and improve market share. However, it also ties up funds, increases the risk of bad debts, and incurs administrative costs. The trade-off is central to setting an optimal credit policy.

Lesson 5.5: Inventory Management and Payables Management

This lesson focuses on the management of inventory and accounts payable, two critical components of the working capital cycle. It covers strategies for balancing inventory costs with operational needs and managing supplier relationships.

Detailed Notes:

• Inventory Management: Holding inventory is necessary for smooth operations, but it also ties up cash. The objective of inventory management is to balance the risk and cost of holding inventory against the need to meet demand. This involves:

  • Inventory Strategies: Balancing inventory levels and cash flow .

  • Inventory Models: Using tools like Economic Order Quantity (EOQ) and Reorder Point models to calculate optimal stock levels. The CCH course covers “Inventory: Balance stock levels to avoid costly excesses and devastating stockouts using Economic Order Quantity and Reorder Point models” .

  • Inventory Ratios: Using key inventory ratios to monitor performance .

• Accounts Payable Management: Trade credit, the financing provided by suppliers, is a significant source of short-term funds. Managing accounts payable involves:

  • Payment Policies: Deciding on optimal payment strategies and whether to take discounts .

  • Negotiating with Suppliers: Negotiating terms with suppliers to improve cash flow .

  • Balancing Payables and Cash Availability: Managing disbursements and the trade-off between paying early (to get discounts) and delaying payment (to preserve cash) .

• The Purchasing and Payables Manager’s Role: The purchasing manager makes decisions on purchases, suppliers, and may negotiate payment terms. The payables manager makes decisions on payment policies and on whether to take discounts .