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Management of Accounts Receivable (The Variables Related to The Parameter,…
Management of Accounts Receivable
The Variables Related to The Parameter
Sales
Net Income
Rate of Return on Sales and ROA
The Volume of Receivables
Net Operating Cash Flow (NOCF)
Bad Debt Expense
Cash Discount
Definition
An incentive that a seller offers to a buyer in return for paying a bill before the scheduled due date to pay their bills within a specified time
Benefit
Cash discounts can benefit a provider of goods or services by giving her the cash sooner than she normally would get it. In turn, this cash could help her to grow the business at a faster pace while saving on administrative expenses
Receiving a cash discount could help make the company more effective and shorten the number of days it can take to convert its resources into cash flows.
Determining The Amount
The amount of the cash discount is usually a percentage of the total amount of the invoice, but it is sometimes stated as a fixed amount.
The Cash Discount Period
If the seller is offering a reduction of 2% of the amount of an invoice if it is paid within 10 days, or normal terms if paid within 30 days...
That information would appear on the invoice as "2% 10 / Net 30."
The Credit Period
The length of time a customer has to pay
The Collection Effort
The activity of both screening a potential customer and following up to see that the customer pays his/her invoice
The Credit-Granting Decision Rule
Expected gain > Expected loss