Chapter 20 – Credit and Inventory Management
Chapter 20
CREDIT AND INVENTORY MANAGEMENT
CHAPTER WEB SITES
Section
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CHAPTER ORGANIZATION
20.1 Credit and Receivables
20.2 Terms of the Sale
20.3 Analyzing Credit Policy
20.4 Optimal Credit Policy
20.5 Credit Analysis
When Should Credit Be Granted?
20.6 Collection Policy
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20.7 Inventory Management
20.8 Inventory Management Techniques
20.9 Summary and Conclusions
ANNOTATED CHAPTER OUTLINE
20.1. Credit and Receivables
A. Components of Credit Policy
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Accounts receivable = average daily sales * average collection
period
20.2. Terms of the Sale
Credit period – amount of time allowed for payment
A. The Basic form
The terms 2/10 net 60 mean you receive a 2% discount if you pay
B. The Credit Period
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C. Cash discounts
Offered by sellers to induce early payment. Not taking the discount
involves a cost of credit for the purchaser.
Chapter 20 – Credit and Inventory Management
Lecture Tip: When a company does not take advantage of discount
terms, such as those given above, it is effectively borrowing the
D. Credit instruments
Evidence of indebtedness
International Note: Various investments have been developed to
shift the risk of non-payment of receivables in international
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20.3. Analyzing Credit Policy
A. Credit Policy Effects
B. Evaluating a Proposed Credit Policy
Lecture Tip: It’s useful to point out that the process for
Define:
Benefit of switching is the change in cash flow
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20.4. Optimal Credit Policy
A. The Total Credit Cost Curve
B. Organizing the Credit Function
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Lecture Tip: As noted in the text, separating the finance and non-
finance lines of business by creating a captive finance subsidiary
20.5. Credit Analysis
Lecture Tip: Students receive a large number of credit card offers
A. When Should Credit Be Granted?
B. Credit information:
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Lecture Tip: You may wish to emphasize here that full-blown
credit analysis contains both quantitative and qualitative aspects.
As any loan officer will tell you, using the five C’s to evaluate a
Credit scoring – assigning a numerical rating to customers based
on credit history
Ethics Note: Credit scoring models were initially introduced in the
1940s and became widespread in the 1960s. Companies that use
20.6. Collection Policy
A. Monitoring receivables
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Aging schedule – a break-down of receivables accounts by age
Lecture Tip: Wilbur Lewellen and Robert Johnson demonstrate
that two of the traditional receivables monitoring tools – average
B. Collection Effort
The sequence of steps taken in collecting overdue accounts.
Real-World Tip: Health-care providers face unusual challenges in
dealing with collection policy. A correspondent on the financial
management listserv made the following comments regarding
collection policy and procedure for a multi-specialty physician’s
group:
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In other words, the steps in the collection policy used at this firm
progress from mild to aggressive, as suggested in the text.
Real-World Tip: Securitization involves selling an expected series
of cash flows to investors. It works something like this: a company
20.7. Inventory Management
A. The Financial Manager and Inventory Policy
Many people, not just those in the finance function, influence the
level of inventory. Nonetheless, financial managers see the results
B. Inventory Types
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-Finished goods
C. Inventory Costs
Lecture Tip: Boeing Corporation is one of the largest
20.8. Inventory Management Techniques
A. The ABC Approach
B. The Economic Order Quantity Model
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Lecture Tip: The EOQ model assumes that the firm’s inventory is
Lecture Tip: If students have had calculus, you can point out that
C. Extensions to the EOQ Model
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D. Managing Derived-Demand Inventories
Materials Requirements Planning – computer based systems that
manage the manufacturing process to make sure that inventory will
20.9. Summary and Conclusions
Appendix 20A
MORE ABOUT CREDIT POLICY ANALYSIS
A. Two Alternative Approaches
1. The One Shot Approach
Do not switch policy: Cash flow = (P – v)Q
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B. Discounts and Default Risk
Define: