BFN 110 Lecture Notes - Lecture 27: Accounts Receivable, Opportunity Cost, Credit Risk
6 Jan 2021
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Trade credit is an effective financing source for smaller firms as they lack access to capital markets of bank financing. Accounts receivable should be deemed as an investment. The return on this current asset should be compared with the direct cost of borrowing or the opportunity cost of investing in other assets. 3 primary policy variables to consider in conjunction with our profit objective are: credit standards: Credit risk analysis related to the four cs of credit: Capacity ability to pay: terms of credit, collection policy. Conditions state of the economy and industry impact on customer. Term of trade: the length of time credit is granted and whether a discount is allowed. Set different credit period to increase sales. Offer credit terms to encourage early payment. Enables the customer to obtain a 2% discount if the invoice is paid within 10 days, if not the full amount is payable within 30 days.
