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1、After studying this chapter, you should understand:LO1 How firms manage their receivables and the basic components of a firms credit policies. LO2 How to analyze the decision by a firm to grant credit. LO3 The types of inventory and inventory management systems used by firms. LO4 How to determine th
2、e costs of carrying inventory and the optimal inventory level.LEARNING OBJECTIVES644Short-Term Financial Planning and ManagementPART 720CREDIT AND INVENTORY MANAGEMENT HOME FURNISHINGS COMPANY LINENS N THINGS was in poor shape financially in April 2008, and many suppliers stopped shipping merchandis
3、e to the retailer because of slow or no payments. In an unusual effort to keep the doors open, the company agreed to pay between 60 and 100 of its suppliers “CBD,” or cash before delivery, instead of the more typical one to two months after delivery. Unfortunately for the company, it was still force
4、d to declare bank-ruptcy. When this happened, suppliers who were owed money faced the consequences. For example, Amcor, an appliance and consumer electronics manu-facturer, was owed $3.68 million on a shipment of GPS units. Because of the bankruptcy proceedings, Amcor expected to lose between $500,0
5、00 and $750,000 of the amount owed, a significant loss for the relatively small company. Other creditors included Calphalon, KitchenAid, and Yankee Candle Co. As this case shows, extending credit can lead to large losses when the customer cant (or wont) pay, and, conse-quently, credit management is
6、an important aspect of short-term finance. Master the ability to solve problems in this chapter by using a spreadsheet. Access Excel Master on the student Web site 644ros46128_ch20.indd 6441/15/09 6:56:49 PM1/15/09 6:56:49 PMC H APT E R 2 0 Credit and Inventory Management 645Credit and Receivables
7、When a firm sells goods and services, it can demand cash on or before the delivery date or it can extend credit to customers and allow some delay in payment. The next few sections provide an idea of what is involved in the firms decision to grant credit to its customers. Granting credit is making an
8、 investment in a customeran investment tied to the sale of a product or service. Why do firms grant credit? Not all do, but the practice is extremely common. The obvi- ous reason is that offering credit is a way of stimulating sales. The costs associated with granting credit are not trivial. First,
9、there is the chance that the customer will not pay. Sec-ond, the firm has to bear the costs of carrying the receivables. The credit policy decision thus involves a trade-off between the benefits of increased sales and the costs of granting credit. From an accounting perspective, when credit is grant
10、ed, an account receivable is cre-ated. Such receivables include credit to other firms, called trade credit, and credit granted consumers, called consumer credit. About one-sixth of all the assets of U.S. industrial firms are in the form of accounts receivable, so receivables obviously represent a ma
11、jor invest-ment of financial resources by U.S. businesses. COMPONENTS OF CREDIT POLICY If a firm decides to grant credit to its customers, then it must establish procedures for extending credit and collecting. In particular, the firm will have to deal with the following components of credit policy:1
12、. Terms of sale : The terms of sale establish how the firm proposes to sell its goods and services. A basic decision is whether the firm will require cash or will extend credit. If the firm does grant credit to a customer, the terms of sale will specify (perhaps im- plicitly) the credit period, the
13、cash discount and discount period, and the type of credit instrument. 2. Credit analysis : In granting credit, a firm determines how much effort to expend trying to distinguish between customers who will pay and customers who will not pay. Firms use a number of devices and procedures to determine th
14、e probability that customers will not pay; put together, these are called credit analysis. 3. Collection policy : After credit has been granted, the firm has the potential problem of collecting the cash, for which it must establish a collection policy. In the next several sections, we will discuss t
15、hese components of credit policy that collec- tively make up the decision to grant credit. THE CASH FLOWS FROM GRANTING CREDIT In a previous chapter, we described the accounts receivable period as the time it takes to col- lect on a sale. There are several events that occur during this period. These
16、 events are the cash flows associated with granting credit, and they can be illustrated with a cash flow diagram: Credit sale is madeCustomer mails checkCash collectionAccounts receivableThe Cash Flows of Granting CreditTimeFirm deposits check in bankBank credits firms account20.120.1terms of sale The conditions under which a firm sells its goods and services for cash or credit. terms of sale
