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Finance, Dr. Hubbard, Spring 2012, Trinity University

accounts receivable management

refers to the decision a business makes regarding its overall credit and collection policies and the evaluation of individual credit applicants

optimal credit policy

in formulating this, a company's financial managers must analyze the marginal benefits and costs associated with changes in three variables (credit standards, credit terms, collection effort)

optimal credit policy

what are these three variables a part of?
--credit standards
--credit terms
--collection effort

individual credit applicants

the evaluation of these consists of the following three principal steps:


(step 1 of evaluating individual credit applicants); relevant information on the credit applicant


(step 2 of evaluation individual credit applicants); the information obtained to determine the applicant's creditworthiness


(step 3 of evaluation of individual credit applicants); whether to extend credit to the applicant and, if so, determining the amount of the line of credit

optimal level of inventory investment

the determination of this requires that the benefits and costs associated with alternative levels be measured and compared

inventory related costs

these include:
--ordering costs
--carrying costs
--stockout costs

inventory control models

the use of these can aid in efficiently managing a company's level of inventory investment

economic order quantity model

this permits determination of the quantity of an inventory item that should be ordered to minimize total inventory costs

marginal benefits; marginal costs

a company should change its credit extension policy only if the expected what of the change will exceed the expected what.

liberal credit policy

this normally leads to increased sales and generates marginal benefits in the form of higher gross profits

marginal costs

the _________ of a liberal credit policy include the cost of the additional funds invested in accounts receivable and inventories, any additional credit checking and collection costs, and increased bad-debt expenses

total cost

= ((D/Q) x S) + ((Q/2) x C)


= square root of [(2xSxD)/C]


= Q* / (D/365)

3 credit policy variables

what are these?
1). credit standards
2). credit terms
3). collection effort

3 credit policy variables

these can be used to control the average collection period and bad-debt loss ratio

credit standards

the criteria a business uses to screen its credit applicants

credit terms

the conditions under which customers are required to repay the credit extended to them; these specify the length of the credit period and the cash discount (if any) given for early payment

collection effort

represents the methods used in attempting to collect payment from past-due accounts

5 Cs of credit

what are these? character, capacity, capital, collateral, and conditions

5 Cs of credit

these can be used as credit-screening guidelines to help ensure that a company will consider most of the relevant factors in the analysis and decision-making process


inventories serve as what between the various stages of the manufacturing firm's procurement-production-sales cycle


by uncoupling the various phases of the firm's operations, inventories provide the firm with this in timing purchases, scheduling production, and meeting fluctuating, uncertain demand for the finished product

inventory related costs

these include ordering costs, carrying costs, and stockout costs

ordering costs

include all the costs of placing and receiving an order

carrying costs

include the various costs of holding items in inventory, including the cost of funds invested in inventory

stockout costs

the costs incurred when demand exceeds available inventory, such as lost profits

inventory control models

usually classified into two types: deterministic and probabilistic

deterministic inventory control model

this is used if demand and lead time are known with certainty

probabilistic inventory control model

this is used if demand and/or lead time are random variables with known probability distributions

deterministric economic order quantity (EOQ)

the objective of this model is to find the order quantity tat minimizes total inventory costs

economic order quantity

this is equal to the square root of (2SD/C), where D is the annual demand; S is the fixed cost per order; and C, is the annual carrying cost per unit

probabilistic inventory control models

these require consideration of the possibility of stockouts

safety stock

one approach used to handle the problem of stockouts, is to add what to the inventory

just-in-time inventory models

these are based on the concept that required inventory items are supplied exactly as needed by production

inventory investment

successful implementation of just-in-time models can reduce inventory investment

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