POINTS TO REMEMBER
  1. What are the benefits of the credit sale/maintaining accounts receivable?
    • Greater sales leading to greater profitability
    • Absorption of fluctuation in demand
    • Providing liquidity to the firm
    • Effective tool for price discrimination
    • Encouragement to intermediaries
  2. What are the costs of maintaining accounts receivable?
    • Financing cost or the interest cost during the period when cash is tagged with receivables
    • Administrative cost
    • Collection cost
    • Bad debt losses
  3. How do you optimise the terms of the credit?
    • A particular credit term is optimal when:
      1. Net profit calculated through proforma income statement is the highest
      2. Expected rate of return, meaning the incremental tax-adjusted operating profit divided by the additional investment ...

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