Capítulo 2 Cotidianidad, Espacio y Sujeto Social: La bicicleta como referencia concreta.
2.2 El estudio de la vida diaria y la cotidianidad como posibilitador de transformación social.
(i) Computation of average age of receivables: It involves computation of average
collection period.
(ii) Ageing Schedule: When receivables are analysed according to their age, the process is
known as preparing the ageing schedules of receivables. The computation of average age of receivables is a quick and effective method of comparing the liquidity of receivables with the liquidity of receivables in the past and also comparing liquidity of one firm with the liquidity of the other competitive firm. It also helps the firm to predict collection pattern of receivables in future. This comparison can be made periodically. The purpose of classifying receivables by age groups is to have a closer control over the quality of individual accounts. It requires going back to the receivables ledger where the dates of each customer’s purchases and payments are available. The ageing schedule, by indicating a tendency for old accounts to accumulate, provides a useful supplement to average collection period of receivables/sales analysis. Because an analysis of receivables in terms of associated dates of sales enables the firm to recognise the recent increases, and slumps in sales. To ascertain the condition of receivables for control purposes, it may be considered desirable to compare the current ageing schedule with an earlier ageing schedule in the same firm and also to compare this information with the experience of other firms. The following is an illustration of the ageing schedule of receivables:-
Ageing Schedule Age Classes
(Days) As on 30
th June, 2013 As on 30th September, 2013
Month
of Sale Receivables Balance of Percentage to total Month of Sale Receivables Balance of Percentage to total
(` ) (` )
1-30 June 41,500 11.9 September 1,00,000 22.7
31-60 May 74,200 21.4 August 2,50,000 56.8
61-90 April 1,85,600 53.4 July 48,000 10.9
91-120 March 35,300 10.2 June 40,000 9.1
121 and more Earlier 10,800 3.1 Earlier 2,000 0.5
3,47,400 100 4,40,000 100
The above ageing schedule shows a substantial improvement in the liquidity of receivables for the quarter ending September, 2013 as compared with the liquidity of receivables for the quarter ending June, 2013. It could be possible due to greater collection efforts of the firm.
(iii) Collection Programme:
(a) Monitoring the state of receivables.
(b) Intimation to customers when due date approaches.
(d) Threat of legal action on overdue A/cs. (e) Legal action on overdue A/cs.
The following diagram shows the relationship between collection expenses and bad debt losses which have to be established as initial increase in collection expenses may have only a small impact on bad debt losses.
Illustration 6 : Mosaic Limited has current sales of ` 1.5 lakh per year. Cost of sales is 75 per cent of sales and bad debts are one per cent of sales. Cost of sales comprises 80 per cent variable costs and 20 per cent fixed costs, while the company’s required rate of return is 12 per cent. Mosaic Limited currently allows customers 30 days’ credit, but is considering increasing this to 60 days’ credit in order to increase sales.
It has been estimated that this change in policy will increase sales by 15 per cent, while bad debts will increase from one per cent to four per cent. It is not expected that the policy change will result in an increase in fixed costs and creditors and stock will be unchanged.
Should Mosaic Limited introduce the proposed policy? Solution
New level of sales will be 15,00,000×1.15 = ` 17,25,000 Variable costs are 80% ×75% = 60% of sales
Contribution from sales is therefore 40% of sales
` `
Proposed investment in debtors = 17,25,000×60/365 = 2,83,562 Current investment in debtors = 15,00,000×30/365 1,23,288
Increase in investment in debtors 1,60,274
Increase in contribution = 15% ×15,00,000×40% = 90,000 New level of bad debts = 17,25,000×4% = 69,000
Current level of bad debts 15,000
Increase in bad debts (54,000)
Additional financing costs = 1,60,274×12% = (19,233) Savings by introducing change in policy 16,767
Advise: The financing policy is financially acceptable, although the savings are not great. Illustration 7 : Misha Limited presently gives terms of net 30 days. It has ` 6 crores in sales, and its average collection period is 45 days. To stimulate demand, the company may give terms of net 60 days. If it does instigate these terms, sales are expected to increase by 15 per cent. After the change, the average collection period is expected to be 75 days, with no difference in payment habits between old and new customers. Variable costs are ` 0.80 for every `1.00 of sales, and the company’s required rate of return on investment in receivables
is 20 per cent. Should the company extend its credit period? (Assume a 360 days year). Solution
Receivable turnover = 4.8 75 360=
Profitability of additional sales = ` 90,00,000 × .2 = ` 18,00,000.
Additional receivables associated with the new sales = ` 90,00,000 18,75,000`
4.8 =
Additional investment in receivables associated with the new sales = ` 18,75,000 × .8 = ` 15,00,000 New level of receivables associated with the original sales
= ` 6,00,00,000 1,25,00,000`
4.8 =
Old level of receivables associated with the original sales = ` 6,00,00,000 75,00,000`
8 =
Incremental receivable investment, original sales = ` 50,00,000.
Total increase in receivable investment = ` 15,00,000 + ` 50,00,000= ` 65,00,000. Carrying cost of additional investment = .20 ×` 65,00,000 = ` 13,00,000.
Advise : As the incremental carrying cost is less than the incremental profitability, the
Illustration 8 : The Megatherm Corporation has just acquired a large account. As a result, it needs an additional ` 75,000 in working capital immediately. It has been determined that there are three feasible sources of funds:
(a) Trade credit: The company buys about ` 50,000 of materials per month on terms of 3/30, net 90. Discounts are taken.
(b) Bank loan: The firm’s bank will lend ` 1,00,000 at 13 per cent. A 10 per cent compensating balance will be required, which otherwise would not be maintained by the company.
(c) A factor will buy the company’s receivables (` 1,00,000 per month), which have a collection period of 60 days. The factor will advance up to 75 per cent of the face value of the receivables at 12 per cent on an annual basis. The factor will also charge a 2 per cent fee on all receivables purchased. It has been estimated that the factor’s services will save the company a credit department expense and bad-debt expenses of `1,500 per month. On the basis of annual percentage cost, which alternative should the company select? Solution
(a) Cost of trade credit: If discounts are not taken, upto ` 97,000 can be raised after the second month. The cost would be
18.81% 60
365 97
3 × =
(b) Cost of bank loan: Assuming the compensating balance would not otherwise be
maintained, the cost would be
14.44% 90
13=
(c) Cost of factoring: The factor fee for the year would be
2% × ` 12,00,000 = ` 24,000
The savings effected, however, would be ` 18,000, giving a net factoring cost of ` 6,000. Borrowing ` 75,000 on the receivables would thus cost
(
) (
`)
` ` ` ` ` 12% 75,000 6,000 9,000 6,000 20.00% 75,000 75,000 + = + =Advise: Bank borrowing would be the cheapest source of funds.
Illustration 9 : The Dolce Company purchases raw materials on terms of 2/10, net 30. A review of the company’s records by the owner, Mr. Gupta, revealed that payments are usually made 15 days after purchases are received. When asked why the firm did not take advantage of its discounts, the accountant, Mr. Ram, replied that it cost only 2 per cent for these funds, whereas a bank loan would cost the company 12 per cent.
(a) What mistake is Ram making?
(b) What is the real cost of not taking advantage of the discount?
(c) If the firm could not borrow from the bank and was forced to resort to the use of trade credit funds, what suggestion might be made to Ram that would reduce the annual interest cost?
Solution
(a) Ram is confusing the percentage cost of using funds for 5 days with the cost of using
funds for a year. These costs are clearly not comparable. One must be converted to the time scale of the other.
(b) 149.0%
5 365 98
2 × =
(c) Assuming that the firm has made the decision not to take the cash discount, it makes no
sense to pay before the due date. In this case, payment 30 days after purchases are received rather than 15 would reduce the annual interest cost to 37.2 per cent.
UNIT – V : MANAGEMENT OF PAYABLES (CREDITORS)