FinancialAnalysis,PlanningandForecasting.pptVIP

Financial Analysis, Planning and ForecastingTheory and Application By Alice C. Lee San Francisco State University John C. Lee J.P. Morgan Chase Cheng F. Lee Rutgers University Outline 19.1 Introduction 19.2 Trade credit 19.3 The cost of trade credit 19.4 Financial ratios and credit analysis 19.5 Credit decision and collection policies 19.6 Summary 19.1 Introduction 19.2 Trade credit （19-1） Table 19-1 19.3 The cost of trade credit The seller’s perspective The buyer’s perspective 19.3 The cost of trade credit Current sales ＄1 million per year. S Incremental sales ＄250,000. V Variable costs as a percentage of sales 70 percent. includes the cost of administering the credit department and all other costs except bad-debt losses and financing costs interest charges associated with carrying the investment in receivables. Costs of carrying inventories are included in . 1-V Contribution margin 30 percent or equivalently, the percentage of each sales dollar that goes toward covering overhead and increasing profits. k The cost of financing the investment in receivables 12 percents. k is the firm’s cost of new capital when the capital is used to finance receivables. Average collection period prior to a change in credit policy 20 days. New average collection period after the credit policy change 30 days. In this example, we assume that customers pay on time, thus ACP specified collection period . 19.3 The cost of trade credit 19-2 19.3 The cost of trade credit （19-3） （19-4） 19.4 Financial ratios and credit analysis Financial ratio analysis Numerical credit scoring Benefits of credit-scoring models Outside sources of credit information 19.4 Financial ratios and credit analysis 19-5 Table 19-2 19.4 Financial ratios and credit analysis Figure19-1 Distributions of Good and Bad Accounts 19.4 Financial ratios and credit analysis 19-6 19.4 Financial ratios and credit analysis Figure 19-2 Key to Dun and Bradstreet Ratings 19.5