DPB5043 RECEIVABLE MANAGEMENT

In accounts receivable management, credit analysis is the process of determining the probability that customers will not pay.

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The cost of trade credit has two components. The first component involves taking cash discount with free credit costs. The second component involves the expensive cost of credit for not taking the cash discount.

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The cost of trade credit is defined as the cost of taking the cash discount.

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Several key factors that influence the level of investment in account receivables are the percentage of credit sales to total sales, the level of sales, and credit & collection policy.

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The credit term 3/10 net 40 means customers will receive 10% cash discount from the invoice price if payment is made within the first three days. However, payment must be made within 30 days.

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Terms of sale will determine the percentage of cash discount, the credit period and the discount period.

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An invoice dated 1 June 2020, with credit term 3/10 net 30 is RM10,000. It means, customers enjoy free credit of RM9,700 within the first 10 days and pay full RM10,000 if fail to pay within that time.

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Sales and profits will decrease when credit policy is lenient.

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A lenient credit policy has negative impact of an increase in bad debt and additional cost of funding tied to account receivables and inventory.

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A quality customer to grant credit refers to the customer's strength and creditworthiness.

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