Menu
Home
Log in / Register
 
Home arrow Accounting arrow Working Capital And Strategic Debtor Management
< Prev   CONTENTS

7.7. Summary and Conclusions

The preceding series of Exercises reveal that the accounting convention whereby companies should maintain a 2:1 working capital ratio (underpinned by an analysis of Balance Sheet liquidity) is invariably sub-optimal.

For a given level of sales, at any point in time:

Corporate wealth is dependent on the net inflow of cash associated with the efficient management of its overall investment and financing decisions using the time value of money and net present value (NPV) analyses.

From a managerial working capital perspective (subject to no loss of goodwill) we might therefore conclude that receipts from debtors should be collected as soon as possible, whilst payments to creditors should be delayed as long as possible. However, such policies are too simplistic.

As a guide to further study, you should remember that the primary purpose of a company's terms of sale is to increase profit through turnover. Why else offer trade credit?

o Management's overall objective should be to maximize current liabilities and minimize current assets compatible with their debt paying ability, based upon future cash profitability.

o Variations in the cash discount, discount period and credit period should all represent dynamic marketing tools designed to achieve this financial objective.

o Based upon the time value of money and opportunity cost concepts, the terms of sale create purchasing power for customers. Properly conceived they should therefore enhance demand for the creditor firm and hopefully, net profits from revenues within a framework of effective prices and the annual cost of trade credit.

o Contrary to the balance of academic literature and accounting practice, terms of sale need not conform to industry norms. They may be unique to the creditor firm, depending on the risk profile of their customer portfolio.

To conclude our analysis, it therefore follows that an optimum debtor strategy defined by a company's terms of sale (including the division between discounting and non-discounting customers) not only determines an optimum investment in debtors but also optimum inventory, cash and creditor policies. Amalgamate all these components and the optima define an efficient structure of current assets and liabilities at any point in time and the firm's future working capital requirements.

7.8. Selected References

Text Books:

Working Capital and Strategic Debtor Management, 2013.

Business Texts:

Working Capital Management: Theory and Strategy, 2013.

Strategic Debtor Management and the Terms of Sale, 2013.

 
Found a mistake? Please highlight the word and press Shift + Enter  
< Prev   CONTENTS
 
Subjects
Accounting
Business & Finance
Communication
Computer Science
Economics
Education
Engineering
Environment
Geography
Health
History
Language & Literature
Law
Management
Marketing
Philosophy
Political science
Psychology
Religion
Sociology
Travel