FINANCIAL MANAGEMENT - II

Session 18 & 19

Working Capital Management

(Principles or Overview of WCM)
 Current Assets and Current Liabilities

• Current assets management is an integral part of the

overall financial management

• Working capital management is concerned with the

problems that arise in attempting to manage the
current assets, the current liabilities and the
interrelationship that exists between them.
 Meaning of CA and CL

• Current assets refers to those assets which in the

ordinary course of business can be converted into
cash with in one accounting year

• Current liabilities are those liabilities which are

intended, at their inception, to be paid in the
ordinary course of business, within a year.
 Constituents of Current Assets

• CASH IN HAND AND BANK BALANCES

• BILLS RECEIVABLE
• SUNDRY DEBTORS (LESS PROVISION FOR BAD DEBTS)
• SHORT-TERM LOANS AND ADVANCES
• INVENTORIES OF STOCKS
 RAW MATERIALS
 WORK IN PROCESS
 STORES AND SPARES
 FINISHED GOODS
• TEMPORARY INVESTMENTS OF SURPLUS FUNDS
• PREPAID EXPENSES
• ACCRUED INCOMES
 Constituents of Current Liabilities

• BILLS PAYABLE
• ACCOUNTS PAYABLE (or creditors)
• SUNDRY CREDITORS
• OUTSTANDING EXPENSES
• SHORT-TERM LOANS,ADVANCES
• DIVIDENDS PAYABLE
• BANK OVERDRAFT
• PROVISION FOR TAXATION
• ACCRUED EXPENSES
 Goal of Working Capital Management

• Each of the current assets must be managed

efficiently in order to maintain the liquidity of the
firm while not keeping too high a level of any one of
them.

• Each of the short-term sources of financing

must be continuously managed to ensure that
they are obtained and used in the best possible
way.
Goal of Working Capital Management

• The interaction between current assets

and current liabilities is, therefore, the
main theme of the theory of working capital.

• The goal of working capital management is

to manage the firm’s current assets and
liabilities in such a way that a satisfactory
level of working capital is maintained.
 Classification of Required Capital

• Every business needs funds for two reasons

– For its establishment
– To carry out day-to-day operations
• Capital required for a business can be classified
into two main categories
– Fixed capital
– Working capital
• The funds needed for short term requirements
are known as working capital
Classification of the Working Capital

Concepts of working capital

– Gross working capital
– Net working capital

• Gross working capital is the capital invested in

total current assets of the enterprise
• Net working capital is the excess of current assets
over current liabilities.
Classification of the Working Capital

Working capital may be classified in two ways

– On the basis of concept
– On the basis of time

On the basis of concept

– Gross working capital (GWC)
– Net working capital (NWC)
Classification of the Working Capital

On the basis of time

Permanent or fixed working capital

– Regular working capital
– Reserve working capital

Temporary or variable working capital

– Seasonal working capital
– Special working capital
Permanent or Fixed Working Capital

• Minimum amount which is required to ensure

effective utilization of fixed facilities and for
maintaining the circulation of current assets
• Every firm has to maintain a minimum level of
raw material, work-in-process, finished goods and
cash balance
• This minimum level of current assets is called
permanent or fixed working capital
Regular and Reserve Working Capital

Regular working capital

• Capital required to ensure circulation of current assets from cash
to inventories, from inventories to receivables and receivables to
cash and so on
Reserve working capital
• Excess amount over the requirement for regular working capital
which may be provided for contingencies
Temporary or Variable Working Capital

Seasonal working capital

• Amount of working capital to meet the seasonal demands
Special working capital
• To meet special exigencies such as launching of marketing
campaigns, research expenses etc.,
Advantages of adequate working capital

• Solvency of the business

• Goodwill
• Easy loans
• Cash discounts
• Regular supply of raw materials
• Regular payment of salaries, wages etc.
• Exploitation of favorable market conditions
• Ability to face crisis
 Balanced Working Capital Position

Firm should maintain a sound working capital position.

Both excessive or inadequate working capital positions are dangerous.

Dangers of excessive WC:

1. Result in unnecessary accumulation of inventory- chances of inventory waste

and losses increase.

2. Indication of defective credit policy- slack in collection period; higher incidence

of bad debts results which adversely affects profits.

3. Makes management negligent and leads to managerial inefficiency.

Dangers of inadequate WC:

4. Stagnates growth - Difficult to undertake profitable projects for non-availability of

WC.

5. Difficult to implement operating plans and achieve firm’s profit target.

6. Firm loses its reputation when it is not able to honor its short-term obligations; fixed
assets not utilized efficiently due to lack of WC.
 Policies for Financing Current Assets

Keeping in view the constraints of the individual company, a judicious mix of long and
short-term finances should be invested in current assets.

• Long-term financing – Ordinary share capital, preference share capital,

debentures, long-term borrowings from financial institutions, reserves and
surplus (retained earnings).
• Short-term financing – Working capital funds from banks, commercial paper.
• Spontaneous financing – Trade (suppliers’) credit, outstanding expenses.
There is no explicit cost of spontaneous financing.

The real choice of financing current assets – once the spontaneous

financing has been fully utilized, is between long-term and short-term
sources of finance.
 Policies for Financing Current Assets

What should be the mix of short and long-term sources in financing

current assets?
The approach followed by company may be :
1) Matching or Hedging approach – Long-term financing will be used to
finance fixed assets and permanent current assets. Short-term
financing to finance temporary or variable current assets. Adopt a
financing plan which matches the expected life of assets with the expected
life of sources of funds raised to finance assets.
2) Conservative approach- When firm depends more on long-term funds for
financing needs. Firm finances its permanent assets and also part of
temporary current assets with long-term financing. Firm has less risk
of facing the problem of shortage of funds.
3) Relatively Aggressive approach – When the firm uses more short-term
financing than warranted by the matching plan. Part of the permanent
current assets is financed with short-term financing.
Some extremely aggressive firms even finance part of their fixed assets with
short-term financing. Large use of short-term financing makes the firm riskier.
 A Risk-Return Trade-off

A firm should decide whether or not it should use short-term financing. If

short-term financing is used, then determine the portion in total financing.
There is a conflict between long-term and short-term financing.
Short-term financing is less expensive than long-term financing, but at
the same time Short-term financing involves greater risk than long-term
financing.
If the firm uses short-term financing to finance its current assets, runs a
risk of renewing borrowings again and again; exposes firm to certain risks
and may be difficult for firm to borrow during stringent credit periods; disrupt
operating activities.
Less risk when financed with long-term funds.

Choice between long-term and short-term financing involves trade-off

between risk and return.
 Working Capital Finance

Two most significance sources of short-term sources of

finance for WC are :

• Trade Credit – deferral of payment; credit customer gets

from supplier of goods; informal arrangement; stretch the
Accounts payable; spontaneous source of financing –
accrued expenses; accrued wages and salaries; accrued
taxes and interest; deferred income; advance payments.

• Bank Borrowing or bank credit – overdraft; working

capital loans; commercial paper.
 Working Capital- Key Ratios

Ratio Formulae Result Interpretation

On average, you turn over the value of

your entire stock every x days.
You may need to break this down into
product groups for effective stock
management.
Days in Obsolete stock, slow moving lines will
Average Stock *
Inventory
365/
extend overall stock turnover days.
(in days) or = x days Faster production, fewer product lines,
Cost of Goods
Inventory
Period
Sold just in time ordering will reduce average
days.
 Working Capital- Key Ratios

Ratio Formulae Result Interpretation

It takes you on average x days to collect

money due to you. If your official credit
terms are 45 day and it takes you 65 days...
why ?
One or more large or slow debts can drag
out the average days. Effective debtor
management will minimize the days.
Days in Debtors *
=x
Receivables 365/
days
(in days) Sales
 Working Capital- Key Ratios

Ratio Formulae Result Interpretation

On average, you pay your suppliers

every x days. If you negotiate better
credit terms this will increase. If you pay
earlier, say, to get a discount this will
decline. If you simply defer paying your
suppliers (without agreement) this will
Creditors * also increase - but your reputation, the
Payables
365/ = x quality of service and any flexibility
Ratio
Cost of Sales days provided by your suppliers may suffer.
(in days)
(or Purchases)
 Working Capital- Key Ratios

Ratio Formulae Result Interpretation

Current Assets are assets that you can

readily turn in to cash or will do so within
12 months in the course of business.
Current Liabilities are amount you are due
to pay within the coming 12 months. For
example, 1.5 times means that you should
Total Current be able to lay your hands on $1.50 for
Current Assets/ = x every $1.00 you owe. Less than 1 times
Ratio Total Current times e.g. 0.75 means that you could have
Liabilities liquidity problems and be under pressure
to generate sufficient cash to meet
oncoming demands.
 Working Capital- Key Ratios

Ratio Formulae Result Interpretation

(Total Current
Assets - Similar to the Current Ratio but takes
Quick =x
Inventory)/ account of the fact that it may take time to
Ratio times
Total Current convert inventory into cash.
Liabilities
 Working Capital- Key Ratios

Ratio Formulae Result Interpretation

(Inventory +
Working A high percentage means that working
Receivables - As %
Capital capital needs are high relative to your
Payables)/ Sales
Ratio sales.
Sales
 Other working capital measures

• Other working capital measures include the following:

• Bad debts expressed as a percentage of sales.
• Cost of bank loans, lines of credit, invoice discounting etc.
• Debtor concentration - degree of dependency on a limited
number of customers.
• Once ratios have been established for your business, it is
important to track them over time and to compare them with
ratios for other comparable businesses or industry sectors.
Working capital cycle across industries

• Every industry has its own set of dynamics that

influences its working capital cycle

• Aviation sector, Real estate sector, Gems &

Jewellery, Engineering, Power sector, Sugar
sector and Textile sector are highly capital intensive.

• These companies realize proceeds from sales over a

longer time-frame. This characteristic of a longer
cycle between sales and realization of proceeds is
reflected in their higher working capital requirements.
Working capital cycle across industries

Net
Working working
Receivable  Inventory  Payable  ROE
Industry cycle  cycle or
(in days) (in days) (in days) (%)
(in days) CCC 
(in days)

Aviation 44 105 149 97 52 0.0

Cement 17 49 66 48 18 11.7

Real Estate 127 603 730 138 592 9.8

Gems &
79 53 132 76 56 14.0
Jewellery

Engineering 97 40 137 72 65 27.4

IT 77 5 82 39 43 24.5

Metals 51 36 87 9 78 19.0
Working capital cycle across industries
Net working
Working
Receivable  Inventory  Payable  cycle or
Industry cycle  ROE (%)
(in days) (in days) (in days) CCC
(in days)
(in days)

Mining 28 33 61 78 -17 31.7

Oil and Gas 26 24 50 65 -15 15.2

Petrochemic
35 33 68 67 1 11.5
als

Power 82 22 104 77 27 10.5

Refineries 11 39 50 40 10 14.4

Sugar 17 124 141 84 57 9.5

Tea/Coffee 26 57 83 54 29 16.5

Textile 51 79 130 37 93 12.0

FMCG 18 46 64 76 -12 37.0

Working capital cycle across industries

• There are different reasons in each industry for

the relatively longer working capital cycle.
• Reasons ranging from time-consuming projects,
higher levels of import/export, longer debt recovery
and commodity-based seasonal inputs stretch
working capital cycles.

• This results in raising working capital

requirements.
Why some companies have huge negative
working capital ?

• A negative Working Capital need not always be a

bad thing.
• Large companies have a consistent negative
working capital since they have the muscle power,
can demand longer credit periods from their
fragmented suppliers.
• They are also able to make sales in cash or collect
payments within a few days.
Why some companies have huge negative
working capital ?

• Consider a analogy of a trader, who buys goods on

a credit card that has a cycle of 45 days.
• If he can sell all his goods and collect the proceeds
within a month, he can roll the money till the card
payment due date.
• This means he can invest for the short-term and
make additional profit on it.
Why some companies have huge negative
working capital ?

• The negative working capital phenomenon not only

depends on the size of the company, but also on
the kind of business.

• Large companies have a high bargaining power,

they are also able to extract favorable terms from
their suppliers.

• For example – Telecom, Aviation, FMCG…

 Factors determining the working capital

• Nature or character of business

• Production policy
•Manufacturing process/length of production cycle
• Seasonal variations
• Working capital cycle
• Credit policy
• Business cycle
 
 Factors requiring consideration :
Estimation of Working Capital

• Total costs incurred on material, wages and

overheads
• The length of time for which raw materials are to
remain in stores before they are issued for
production
• The length of the production cycle or work-in-
progress
• The length of sales cycle during which finished
goods are to be kept waiting for sales
Estimation of Working Capital- Factors

• The average period of credit allowed to customers

• The amount of cash required to pay day-to-day
expenses of the business
• The average of cash required to make advance
payments
• The average of credit period expected to be
allowed by suppliers
• Time lag in the payment of wages and other
expenses
 Operating cycle

Working capital is required because of the time gap between the

sales and their actual realization in cash. Thus time gap is
technically termed as operating cycle of the business

In case of a manufacturing company, the operating cycle is the

length of time necessary to complete the following cycle of events
– conversion of cash into raw material
– conversion of raw materials into work-in-progress
– conversion of work-in-process into finished product
– conversion of finished products into accounts receivables
– conversion of accounts receivables into cash
 
 
Operating cycle

In case of trading firm the operating cycle will include

the length of time required to convert
1.cash into inventories
2.inventories into accounts receivables
3.accounts receivables into cash

In case of financing firm the operating cycle includes

the length of time taken for
1.conversion of cash into debtors and
2.conversion of debtors into cash
Net operating cycle Vs Operating cycle

An Operating Cycle (OC) - the days required for a business to receive

inventory, sell the inventory, and collect cash from the sale of the inventory.

Net Operating Cycle/ Cash Conversion Cycle - The time from

sale of inventory to the time cash is collected from the sale of
inventory.
 Techniques of assessment:
Estimation of components
Estimation of components of working capital
method:

•  Since working capital is the excess of current

assets over current liabilities, an assessment of the
working capital requirements can be made by
estimating the amounts of different constituents of
working capital e.g., inventories, accounts
receivables, cash, accounts payables etc.,
Techniques of assessment - Percent of
Sales Method
Percent of Sales Method

• This is a traditional and simple method of estimating working

capital requirements. According to this method, on the basis of
past experience between sales and working capital requirements,
a ratio can be determined for estimating the working capital
requirements in future.

• For example, if the past experience shows that working capital

has been 30% of sales and it is estimated that the sales for the
next year would be amounted to 1,00,000 the amount of working
capital requirement can be assessed as Rs.30,000
 
Techniques of assessment- Operating
Cycle Approach
Operating Cycle Approach

• According to this approach, the requirements of working

capital depend upon the operating cycle of the business.
The operating cycle begins with the acquisition of raw
material and ends with collection of receivables. It may be
broadly classified into the following four stages:
Raw materials and stores storage stage
Work-in process state
Finished goods inventory stage and
Receivables collection stage
Techniques of assessment- Operating Cycle Approach

The duration of operating cycle for the purpose of estimating working

capital requirements is equivalent to the sum of the durations of each of
these stages less the credit period allowed by the suppliers of the
firm. Symbolically the duration of the working capital cycle can be put as
follows:

 O = (R + W + F + D) – C

O duration of operating cycle or CCC

R raw materials and stores storage period
W work in process period
F finished stock storage period
D debtors collection period
C creditors payment period
Techniques of assessment- Operating Cycle Approach
Each of the components of the operating cycle can be calculated
as follows:
 
R = Average stock of raw materials and stores/average raw materials
and stores consumption per day
W = Average work-in-progress inventory/average cost of production
per day
F = Average finished stock inventory / average cost of goods sold per
day
D = Average book debts /Average credit sales per day
C = Average trade creditors / Average credit purchases per day
 
Techniques of assessment- Operating Cycle
Approach

After computing the period of one operating cycle,

the total number of operating cycles that can be
completed during a year can be computed by dividing
365 days with the number of operating days in a cycle.

The total operating expenditure in the year will give the

average amount of the working capital requirement.
 
 
Case-let 1
Net OPERATING CYCLE or CCC AND WORKING CAPITAL REQUIRED

Question 1 : From the following data, compute the duration of operating cycle for each of
the two years and comment on the increase/decrease:

  Year 1 Year 2
Stock:    

Raw materials 20,000 27,000

Work-in-progress 14,000 18,000

Finished goods 21,000 24,000

Purchases 96,000 1,35,000

Cost of goods sold 1,40,000 1,80,000

Sales 1,60,000 2,00,000

Debtors 32,000 50,000

Creditors 16,000 18,000

Assume 360 Days per year for computational purposes

Case-let 1 - Solution
Solution:

a)         Calculation of Net Operating Cycle or CCC

              Year 1 Year 2

1. 20/96 x 360 = 75 Days 27/135 x 360 = 72 Days
Raw Material Stock
  (Average Raw Material/Total Purchase x 360)
2. Creditors/Payables 16/96 x 360 = 60 days 18/135 x 360 = 48 days

  (Average Creditor/Total Purchase) x 360

3. Work-in-progress 14/140 x 360 = 36 days 18/180 x 360 = 36 days

  (Average Work-in-progress/Total cost of goods sold) x 360

4. Finished goods 21/140 x 360 = 54 days 24/180 x 360 = 48 days

  (Average Finished goods/Total cost of goods sold) x 360

5. 32/160 x 360 = 72 days 50/200 x 360 = 90 days
Debtors/Receivables
  (Average Debtors/Total Sales) x 360
  177 days 198 days
Net operating cycle or CCC
Case-let 1 - Solution
Solution:
 Case let 2
Q 2. XYZ Ltd. has obtained the following data concerning the average working capital cycle for
other companies in the same industry :

            Raw material stock turnover                                       20 Days

            Credit received                                                           40 Days

            Work-in-Progress Turnover                                         15 Days

            Finished goods stock turnover                                   40 Days

            Debtors' collection period                                             60 Days

                                                                                                95 Days

Using the following data, calculate the current working capital cycle for XYZ Limited and briefly
comment on it.
  (Rs. in '000)
Sales 3,000
Cost of Production 2,100
Purchase 600
Average raw material stock 80
Average work-in-progress 85
Average finished goods stock 180
Average creditors 90
Average debtors 350
 Case let 2 Solution
Solution: Net Operating cycle or CCC of XYZ Ltd.

1.   Raw material

                      (Average Raw Material/Total Purchase x 360) = (80/600*365)   = 49 Days

2.   Work-in-progress

  (Average Work-in-progress/Total cost of goods sold) x 365= (85/2100)*365 = 15 Days

3.   Finished Goods

   (Average Finished goods/Total cost of goods sold) x 365 = (180/2100)*365= 31 Days

4.   Debtors

                        (Average Debtors/Total Sales) x 360 = (350/3000)*365 = 43 Days

5.   Creditors

                       (Average Creditor/Total Purchase) x 365= (90/600)*365 = 55 Days

Net Operating Cycle = 49 days + 15 days + 31 days + 43 days – 55 days

                        = 138 Days – 55 Days = 83 Days

Case let 2 Solution
Comment: For XYZ Ltd., the working capital cycle is below the industry average,
including a lower investment in net current assets. However, the following points should
be noted about the individual elements of working capital.
 

a)  The stock of raw materials is considerably higher than average. So, there is a need for
stock control procedure to be reviewed.

b)   The value of creditors is also above average; this indicates that XYZ Ltd. is delaying
the payment of creditors beyond the credit period. Although this is an additional source
of finance, it may result in a higher cost of raw materials or loss of goodwill among the
suppliers.

c)  The finished goods stock is below average. This may be due to a high demand for the
firm's goods or to efficient stock control. A low finished goods stock can, however,
reduce sales since it can cause delivery delays.

d)  Debts are collected more quickly than average. The company might have employed
good credit control procedure or offer cash discounts for early payments.
 Case-let 3
WORKING CAPITAL REQUIRED

• Question 3 : A proforma cost sheet of a company provides the following particulars:

Elements of Cost Amount per unit
Rs.
Raw Material 80
Direct Labor 30
Overheads 60
            Total Cost 170
Profit 30
            Selling Price 200

The following further particulars are available:

• Raw materials are in stock on an average for one month.

• Materials are in process on an average for half a month.

• Finished goods are in stock on an average for one month.

• Credit allowed by suppliers is one month.

• Credit allowed to customers is two months.

Case-let 3

• Lag in payment of wages is 1½ weeks.

• Lag in payment of overhead expenses is one month.

• One-fourth of the output is sold against cash. Cash in hand and at bank is expected to
be Rs.25, 000.

You are required to prepare a statement showing the working capital needed to
finance a level of activity of 1,04,000 units of production.

You may assume that production is carried on evenly throughout the year, wages and
overheads accrue similarly and a time period of 4 weeks is equivalent to a month.
Case-let 3 - Solution
Statement Showing the Working Capital Needed
Current Assets   Rs.
Minimum cash balance   25,000
(i)         Stock of raw materials (4 weeks)    
            1,60,000 x 4   6,40,000
  Rs.  
(ii)        Work-in-Process (2 weeks):    
            Raw materials 1,60,000 x 2 3,20,000  
            Direct Labor 60,000 x 2 1,20,000  
            Overheads 1,20,000 x 2 2,40,000 6,80,000
(iii)       Stock of Finished goods (4 weeks):    
            Raw Materials 1,60,000 x 4 6,40,000  
            Direct Labour 60,000 x 4 2,40,000  
            Overheads 1,20,000 x 4 4,80,000 13,60,000
(iv)       Sundry Debtors (8 weeks):    
            Raw materials 1,60,000 x 3/4 x 8 9,60,000  
            Direct Labour 60,000 x 3/4 x 8 3,60,000  
            Overheads 1,20,000 x 3/4 x 8 7,20,000 20,40,000
    47,45,000
Less Current Liabilities:    
(i)         Sundry Creditors (4 weeks)    
            1,60,000 x 4 6,40,000  
(ii)        Wages outstanding (1-1/2 weeks): 60,000 x  90,000  

(iii)       Lag in payment of overheads (4 weeks)    

            1,20,000 x 4 4,80,000 12,10,000
            Net Working Capital Needed   35,35,000
Case-let 3 - Solution
• Working Notes:

•  

• (i)         It has been assumed that a time period of 4 weeks is equivalent to one month.

• (ii)        It has been assumed that direct labor and overheads are in process, on average,
half a month.

• (iii)       Profit has been ignored and debtors have been taken at cost.

• (iv)     Weekly calculations have been made as follows:

•            (a) Weekly average of raw materials = 1, 04,000 x 80/52 = 1, 60,000

•            (b) Weekly labor cost = 1, 04,000 x 30/52 = 60,000

•            (c) Weekly Overheads = 1, 04,000 x 60/52 = 1,20,000

 Working Capital
(Debtors Management)
Working Capital - Debtors Management

Objective of Receivables Management

• The term receivables is defined as ‘debt owed to

the firm by customers arising from sale of goods or
services in the ordinary course of business.

• The objective of receivables management is ‘to

promote sales and profits until that point is
reached where the return on investment in further
funding receivables is less than the cost of funds to
finance that additional credit
Costs associated with Receivables Management

Collection Costs:
Administrative costs incurred in collecting the
receivables from the customers to whom credit sales
have been made.

Examples:
• maintenance of credit department
• Expenses involved in acquiring credit information
Costs associated with Receivables Management

Capital Costs:
The increased level of accounts receivable is an
investment in assets.
It is the cost on the use of additional capital to
support credit sales which alternatively could have
been employed elsewhere
Costs associated with Receivables Management

Delinquency cost:

This cost arises out of the failure of the customers to meet their
obligations when payment on credit sales become due after the
expiry of the credit period. The important components of this costs are:

• Blocking-up of funds for an extended period

• Costs associated with steps that have to be initiated to collect the
over dues such as reminders, legal charges etc.

Default cost:
Default costs are the over dues that cannot be recovered.
 Credit Standards – Case let
A firm is currently selling a product @Rs.10 per unit. The most
recent annual sales (all sales credit sales) were 30,000 units. The
variable cost per unit is Rs.6 and the average cost per unit, given
a sales volume of 30,000 units is Rs.8. The total fixed cost is
Rs.60,000. The average collection period may be assumed to be
30 days.
The firm is contemplating a relaxation of credit standards that is
expected to result in a 15 per cent increase in unit sales; the
average collection period would increase to 45 days with no change
in bad debt expenses. it is also expected that increased sales will
result in additional net working capital to the extent of Rs.10,000.
The increase in collection expenses may be assumed to be
negligible. The required return on investment is 15 per cent.

Should the firm relax the credit standard?

Credit Standards

Double click on the file

Source: Brealey Myers and I M

Pandey , Khan and Jain and S N
Maheswari
Credit Terms

• Credit terms specify the repayment terms required

of credit customers/receivables.

• Credit terms have three components:

– Credit period
– Cash discount
– Cash discount period
 Credit Terms
Credit period:
In terms of duration of time for which trade credit is extended –
during this period the overdue amount must be paid the
customer.

Cash discount:
Which the customer can take advantage of, that is, the
overdue amount will be reduced by this amount

Cash discount period:

Which refers to the duration during which the discount can be
availed of. These terms are usually written in abbreviations.
Credit Terms

Cash discount period:

For example ‘2/10 net 30’

2 signifies the rate of cash discount (2 percent) which will
be available to the customers if they pay the overdue within
the stipulated time
10 represents the time duration (10 days) within which a
customer must pay to be entitled to the discount.
30 means the maximum period for which the credit is
available and the amount must be paid in any case before
the expiry of 30 days.
Case let 1
Case let 2
Case let 3
 Write your credit policy

• The set-up of credit function

• Objectives of the credit function

• Terms and conditions of sale

• Sales responsibilities with credit issues

• Billing procedures

• Obtaining Information on new customers

• Procedures for opening new accounts

• Process of assessing the information to arrive at line of credit and credit terms that will
be offered
Write your credit policy

• Monitoring your investment in your customers

• Profiling your customers to do strengths, weakness, opportunity and threat analysis

• The feedback loop for reporting

• Allocating resources and responsibilities

• Defining past-due and bad debts

• Targets, benchmarks and deadlines for the credit function

• Procedure of collecting from delinquent customers.

• Analyzing the changing needs of your markets/customers

Thank You