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CHAPTER 7: ACCOUNTS RECEIVABLE AND INVENTORY MANAGEMENT - Coggle Diagram
CHAPTER 7:
ACCOUNTS RECEIVABLE AND INVENTORY MANAGEMENT
account receivable management
size of a firm's AR determined by:
the volume of credit sales
the average collection period
credit policy
system
or
procedure
in
managing accounts receivable
it provides
services to customers
, smooth out sales and
attract more sales
one of the variables that could affect the firm's sales (i.e. besides price, quality, advertising
credit standard
provides the basis for specifying
acceptable levels
of credit risk that a firm is
willing to bear
and in deciding
who will receive credit
looks at the minimum financial strengths and moral standings the applicants should have in order to receive the credit facilities
to screen potential credit customers for their ability and willingness to pay the credit facilities given
6C's of credit:
character
capacity
capital
condition
collateral
coverage
risk classification:
most desirable
desirable
average
marginal
credit terms
the conditions which credit is given to customers
concerns with:
cash discount for early payment
discount period
the length of time credit outstanding
financial charges for late payment (if any)
collection policy
guidelines for appropriate actions to be taken when accounts are overdue:
reminder
- sending postcard, duplicate invoice or statement with reminder phrases or stickers
follow up
- sending successive follow up letters or personal visit
drastic action
- drawing a draft on a customer, collection by attorney or employing a collection agency
implications of changes in credit policy
credit terms
- lowers price. attracts new customers and reduces default sales outstanding (DSO)
credit standards
- tighter standards reduce bad debt losses, but may reduce sales
collection policy
- tougher policy will reduce default sales outstanding, but may damage customer relationships
definition - outstanding amount
owed to a firm by its customers
from
credit sales
inventory management
definition
the control of assets from
the time of raw material
purchase until
the finished goods to be
sold
types of inventory
raw materials
- basic raw materials purchased from suppliers to initiate the production process
work in process
- partially finished goods requiring additional work before they become finished goods and be sold to customers
finished goods
- represent products that are completed in the production process but not sold
objectives of inventory management
to maximize inventory turnover
to carry sufficient inventories
other objectives - take some time to order raw materials, cheaper to buy in large quantities, economies of scale
inventory management techniques
more inventory = more important
order quantity (how much to order)
reorder point (when to order)
use economic order quantity (EOQ) model to solve two problems
inventory cost
carrying costs
total cost
ordering costs
important terminologies
TIC = total inventory costs
TCC = total carrying costs
TOC = total ordering costs
SS = safety stock
ROP = reorder point
notations
Q = inventory order size - economic order quantity (EOQ)
S =
annual
usage rate
O = ordering costs (per order)
C = carrying costs (per unit)
SS = safety stock
l = lead time (delivery time)
economic order quantity (EOQ)
method use to control inventory
purpose: to minimize cost & how much to order