Download Top of Form Week 4: Internal Control, Cash and Receivables

Week 4: Internal Control, Cash and
Receivables - Discussion
Accounting for and Reporting Receivables (graded)
Receivables constitute an important line item on a company's balance sheet. In this thread, we will discuss the
accounting for receivables, the ways to estimate uncollectible accounts, and how companies manage their
receivables.
How do companies account for the possibility that some of their customers might not pay down the road?
Responses
Responses are listed below in the following order: response, author and the date and time the
response is posted.
Response
Author
Date/Time
Welcome to
week 4
threaded
discussions!
Professor Wilson
3/10/2013 11:06:27 AM
Class,
As we consider start week 4 postings, please consider the following:
Receivables constitute an important line item on a company's balance sheet. In this
thread, we will discuss the accounting for receivables, the ways to estimate
uncollectible accounts, and how companies manage their receivables.
How do companies account for the possibility that some of their customers might not
pay down the road?
Prof Wilson
RE:
Welcome to
week 4
Geri Waldbillig
threaded
discussions!
3/24/2013 12:59:40 PM
" When the Customer Won't Pay
First things first
Fend off collections problems from the start by running credit checks on new clients and by
discussing your prices, service fees and payment requirements with new customers before you do
their work.
If you work on a retainer basis or provide services under a contract, make it clear what services you
will charge for, what deliverables the customer will get for the fee, and what work will incur
additional charges. Be sure to let the customer know how often you will bill and how long they will
have to pay each bill. Put it all in writing and be sure to include a section about your rights and
responsibilities regarding ownership of products, intellectual property or records of work you
perform if bills are not paid. (Have your attorney draw up a boilerplate agreement that will work for
most customers or clients.)
Keep an eye on receivables
Send out your invoices promptly at regularly scheduled intervals. Be sure the client can tell that
your mailing is not just another routine reminder. You may want to stamp the envelope "Invoice
Enclosed" so it doesn't accidentally get thrown out.
Send out reminder notices promptly to any client who doesn't pay within a predetermined time
frame - usually ten to 30 days.
If a client still doesn't pay after reminders are sent, have someone from your accounts receivable
department call the late-payer and try to determine the cause. If you don't have an "accounts
receivable department" have a spouse, secretary or bookkeeper play the role. If the customer is
one you want to keep and is worth keeping, using such an intermediary will make it easier to
maintain a good working relationship with the customer after the bills get paid."
Attard, Janet, When the Customer Won’t Pay, Businessknowhow.com;
Retrieved March 24, 2013 from
http://www.businessknowhow.com/money/wontpay.htm
RE:
Welcome to
week 4
Kristin Muchowski
threaded
discussions!
3/24/2013 4:35:09 PM
A company must account for a specific percentage or dollar amount that they will not receive,
uncollected debit that they must include in their transactions.
Expenses decrease stockholders equity, and stockholders' equity decreases with debits,
uncollectible accounts expense was debited. The allowance for uncollectible accounts was
credited because the company's (resources) decreased. Since assets increase with debits,
they decrease with credits. The allowance for uncollectible accounts is an asset account.
Inasmuch as it usually has a credit balance, as opposed to most assets with debit balances,
the allowance for uncollectible accounts is called a contra asset account.
It is important to note why companies use the allowance for uncollectible accounts rather
than simply using accounts receivable. At the time uncollectible accounts expense is
estimated, accounts receivable can not be decreased immediately because the specific
customers who will not pay are not known at that time. Since the specific customers are
not known, customer accounts in the accounts receivable subsidiary ledger can not be
reduced. Thus, since the accounts receivable subsidiary ledger can not be reduced,
accounts receivable in the general ledger can not be reduced or the two ledgers would not
be in agreement. Remember the total of all accounts in the accounts receivable subsidiary
ledger equals the balance in accounts receivable in the general ledger. Both the accounts
receivable subsidiary ledger and the accounts receivable account in the general ledger will
be reduced when the company identifies the specific customers who will not pay. Thus, in
order to prevent the accounts receivable subsidiary ledger from not agreeing with accounts
receivable in the general ledger, estimated uncollectible accounts receivable are recorded
in the allowance for uncollectible accounts rather than directly reducing accounts
receivable.
When posted to the general ledger, the process of recording uncollectible accounts
receivable and the uncollectible accounts expense affects the following accounts.
Allowance for
Uncollectible Accounts
Accounts Receivable
Uncollectible Accounts
Expense
$50,000
$750
$750
http://faculty.uml.edu/ccarter/Chapter07Part3.htm
RE:
Welcome to
week 4
Rachid Khalfaoui
threaded
discussions!
3/24/2013 4:29:50 PM
Hi Pr Wilson and class,
Receivables are amounts due from customers of the company. They are located in a balance
sheet account called accounts and notes receivable. The uncollected accounts create a need
for funding that business can be conducted to cover a loan from a bank if its cash flow
projections were too optimistic. Also the company can appeal to factoring which is a
financing technique and debit recovery implementation by companies of obtaining advance
funding and outsource the management to a specialized credit institution: the
factor. Factoring is the last action of companies against customers who have not paid their
bills before initiating a legal procedure.
Before all these appeals, the company first manages its receivables which involve five steps
(Text book page 412): Determine to whom to extend credit, establish a payment period,
monitor collections, evaluate the liquidity of receivables, and accelerate cash receipts from
receivables when necessary.
With uncollectible accounts companies charge the loss to bad debts expense, it's net loss.
This is the Direct Write-Off Method ( Text book, page 401).
Rachid
RE:
Welcome to
week 4
Lisa Childs
threaded
discussions!
3/25/2013 12:30:49 AM
Companies can deal with "bad debt" in two ways, the direct write off method
or the allowance method. The direct write off method they simply write off
the uncollectable balance once they are sure it isn't going to be collected. The
allowance method they account for possible bad debt based on past
experiences or what they believe may go unpaid.
RE:
Welcome to
week 4
Professor Wilson
threaded
discussions!
3/25/2013 7:07:57 AM
Lisa, et al (and rest of the class),
Thanks for the posting and A/R discussion. Good job explaining the
different methods available to account for uncollectible A/R. Let's
continue the discussion regarding A/R and consider the following:
Why does GAAP favor the allowance method?
If the direct write-off method is in violation of the matching
principle, who uses it?
Prof Wilson
RE:
Welcome to
week 4
Jessica Dallek
threaded
discussions!
3/25/2013 4:23:47 PM
GAAP prefers the allowance method because with the
allowance method you can track expenses and match them
with their revenues since you are assuming the estimated
percentage of uncollected receivables on a period by period
basis. With the Direct write-off method, the financial
statements would not be accurate as expenses and revenues
would not be matched. I would assume that since GAAP
prefers allowance that all publicly traded companies would
be required to use the allowance method. However, small
businesses, local businesses, and family operations that are
not publicly traded could follow the direct write-off method.
That does not necessarily mean that it is better for small
businesses. Small businesses would benefit for the
allowance method as there would be more accurate
accounting of receivables.
RE:
Welcome to
week 4
David Neville
threaded
discussions!
3/26/2013 6:57:04
AM
With the small company, a direct write off is a
simpler accounting practice that would be
preferable as long as the amount of the write off
isn't too large. As you stated, large corporations are
required to use the allowance method for the
accuracy and accounting clarity for the possible
public investment.
RE:
Welcome to
week 4
Darnell Flax
threaded
discussions!
3/25/2013 6:43:45 PM
As far as I resaerched I believe that GAAP favor the
Allowance write off method because it is adjusted at the end
of each accounting period where as the direct write off is at
the end when they are certain that it will not be paid back, I
would also go with GAAP because you want to be prepared
and up to date on what payments have not been recieved
every month rather than having them wait to the end of the
year to do so.
RE:
Welcome to
week 4
Kristin Muchowski
threaded
discussions!
3/25/2013 7:47:10
PM
Darnell, I would have to agree with you. I believe
this method keeps your books up to date and allows
to track possible errors quicker, causing less
problems down the road. By adjusting at the end of
each accounting cycle a company can see more
efficiently where they are at!
RE:
Welcome to
week 4
Makiko Kishida
threaded
discussions!
3/26/2013 2:50:48 PM
Prof Wilson, Class,
GAAP favors the allowance method because it allows for
businesses to account for bad debt without delay which
causes a non-adherence/violation of the matching principle
in which you should account for expenses in the period they
were incurred or for when revenue was recognized.
The write-off method can be used by small businesses, or by
larger corporations if the amount is insignificant.
RE:
Welcome to
week 4
Elizabeth Smith
threaded
discussions!
3/26/2013 9:26:11 PM
There will be a percentage of customers that will not pay their bill. This is
called bad debt. The GAAP favors the allowance method give the
company a chance to estimate and write off their bad debts. This satisfies
the matching principle.
Direct write-off methods are used for tax purpose. Companies must use
the direct write-off method but will use the allowance method for
accounting period.
http://smallbusiness.chron.com/gaap-rules-writing-off-accounts-receivable36358.html
http://answers.yahoo.com/question/index?qid=20080207194846AAZH9CQ
RE:
Welcome to
week 4
Joshua Roque
threaded
discussions!
3/27/2013 7:24:50 PM
Allowance method allows an organization to estimate their
bad debt based on activity within their period. For example,
you make a 100 in sales and 20% will be paid back. Then
you can set aside 20 dollars
The direct write off method would primarily be used by
small businesses. From my readings and research, the direct
method indicates if someone does not get paid, then you can
take that amount out right away. Within the direct write-off
method, it is more difficult to keep track of any of the
expenses that occur and this causes issues with auditing and
reporting. More accurately, as stated earlier from one of my
classmates direct write off method would not accurately
track expenses and revenues earned by the organization or
small business.
GAAPAllowance
and direct Kimberly Warren
write-off
3/29/2013 7:42:47 PM
GAAP favors the allowance method because it uses
estimates that provide better matching of expenses to
revenues.
Credit card companies use the direct write off method after
210 days.
RE:
Welcome to
week 4
Sara Rinaldo
threaded
discussions!
3/30/2013 7:36:33 PM
The direct write-off method is only used for immaterial
amounts. GAAP favors the allowance method because it
better matches expenses with revenues. It also reports
receivables at a net realizable value on the balance sheet.
This means it is the balance the company expects to receive.
Source: Kimmel, P. D., Kieso, D. E., & Weygandt, J. J. (2011). Financial accounting: tools for
business decision making. (6th ed.). Hoboken, New Jersey: John C. Wiley & Sons, Inc.
RE:
Welcome to
week 4
Elizabeth Smith
threaded
discussions!
3/25/2013 3:37:42 PM
This is called customer delinquency. There are several steps to take.
1.
Attempt to create a payment plan with the client.
2. Depending on the size of the company, they can go to a collections agency. There is a fee and
risk that the collections agency may not be able to collect the invoice.
3. File suit in small claims court.
There are ways of avoiding delinquent customers with large purchases. One can do a credit check
before allowing a customer to purchase the merchandise.
Companies record this as uncollectible accounts receivable. This would be under “Bad debt
expense” account. It’s an operating expense under sales. The expense should be matched with
the sales revenue (since it was a sale that was not collected on but a lost in merchandise). The
balance sheet will report the “net realizable value” of the asset, the amount that company expects
to collect form the customer.
http://www.businessknowhow.com/money/wontpay.htm
http://businessknowledgesource.com/blog/the_causes_of_customer_delinquency_030845.html#m
ore
http://connect.mcgrawhill.com/sites/0077328787/student_view0/ebook/chapter7/chbody1/accounts_receivable.htm
RE:
Welcome to
week 4
Jessica Dallek
threaded
discussions!
3/25/2013 4:18:19 PM
Companies account for some of their customers not paying by monitoring the
records of accounts receivable by time frame (30, 60, 90 days) to pay an item
and establishing percentages of allowances to write-off the bad debt from
customers. GAAP does not allow for direct write-off, so companies have to
estimate at the end of a period how much cash they expect to receive from
customers on account.
RE:
Welcome to
week 4
Darnell Flax
threaded
discussions!
3/25/2013 6:36:38 PM
They woudl write them off using one of the mehtods direct write off or
allowance write off.
RE:
Welcome to
week 4
Makiko Kishida
threaded
discussions!
3/26/2013 2:34:49 PM
Prof Wilson, Class,
I wanted to say 'send the cronies', but I figure that is a completely different
discussion.
Bad Debts can be accounted for using either of two methods: direct write-off
method or the allowance method.
The direct write-off method is entered as an increase to bad debt expense
account and a decrease to accounts receivable. This is done only after it is
certain that the company cannot collect from the customer. This method
allows for the specific uncollected account to be identified and can be taken
as a tax deduction.
The allowance method is entered at the end of each accounting period as an
estimated amount of bad debt. This method does not affect the Accounts
Receivable account, but is made as an entry to Debit Bad Debts Expense and
Credit Allowance for Bad Debts. Later when the actual A/R that is
uncollectible is identified, it is written off against the Allowance for Bad
Debts account.
RE:
Welcome to
week 4
Vi Nguyen
threaded
discussions!
3/26/2013 4:59:32 PM
Companies account for their losses as Bad Debts Expenses. Bad debts
expenses are not uncommon when operation a business on credits. Things
that can affect the bad debts expenses when customers loses their jobs and are
unable to repay they amount owe to the company. These amounts are
considered uncollectible accounts. There are two types of unollectible
accounts: Direct write-off method and allowance method. Direct write-off
method is the expenses is an actual loss and will be written off. Allowance
method is when a company estimate the amount of loss before it becomes a
bad debts expense.
RE:
Welcome to Kaswelda Carter
week 4
3/26/2013 8:01:26 PM
threaded
discussions!
Companies account for customers that don't pay them by using the direct
write-off method. This method is when a company determine receivables
from a particular company to be noncollectable, the company will charge the
loss to the Bad Debts Expense.
The company record bad debts expense in a period different from the period
in which they recorded the revenue.
RE:
Welcome to
week 4
Justin Noel
threaded
discussions!
3/26/2013 10:12:06 PM
As many have mentioned there are many ways they do this. Some loan
against the property itself. You buy carpet and pad from a major retailer but
do not pay they come take it out of your house. By doing this they are saying
that we not only want our money, but in a lot of states even if you file
bankruptcy we still get our stuff back. Some build it into the price. If you go
to Bestbuy and buy a TV it will probably cost more than Amazon. This is
because of a lot of factors, but a major one is that they tie themselves to the
credit that you use. If it does well they do better, if it tanks they do pay. This
money has to come from somewhere and more often than not it si the
consumer. If they let this piece go they do miss out on some opportunity of
profit, but they also let go of the losses that took several million from them
the last few years.
RE:
Welcome to
week 4
Sara Rinaldo
threaded
discussions!
3/27/2013 8:25:22 PM
Companies can do two things if customers do not pay. They can debit Bad
Debt Expense and credit Accounts Receivable which is called the Direct
Write-Off Method. This method does not appropriately match bad debt
expense to sales revenue. Companies can also debit Bad Debt Expense and
credit Allowance for Doubtful accounts which is called the Allowance
Method. This method estimates the uncollectible accounts and matches them
to the sales revenue. When an account actually becomes unpaid, the company
would write off the account. Therefore, they would debit Allowance for
Doubtful Accounts and credit Accounts Receivable.
To account for customers who may not pay, companies can apply a
percentage to accounts receivable to estimate the amount of receivables that
may become uncollectible. This is called the percentage of receivables basis.
The can also apply a percentage to an aging report based on past history.
The longer a balance is outstanding, the more likely it will not be paid and
therefore the higher the percentage. This is called aging the accounts
receivable.
Source: Kimmel, P. D., Kieso, D. E., & Weygandt, J. J. (2011). Financial accounting: tools for business decision
making. (6th ed.). Hoboken, New Jersey: John C. Wiley & Sons, Inc.
RE:
Welcome to
week 4
Stacy Davis-Green
threaded
discussions!
Direct Write-Off Method
1.Uncollected amount written of
f/charged
Off to the Uncollectible Acct
Expense
2. This is an adjusting entry;
contains one income statement and
one balance sheet account.
Not
considered to be in conformity with
GAAP because its results in
improper of revenue and expenses
3. debt maybe written off when it is
known with certainty that the
customer is not going to pay
RE:
Welcome to
week 4
Kelly Stewart
threaded
discussions!
3/27/2013 9:05:46 PM
Allowance Method
1.Estimating the uncollectible
amount at the end of the accounting
period, creating an allowance for
doubtful accounts
2.Bad debt expense account appears
on the income statement
3. The amount of receivables left
after subtracting the allowance
amount is referred as Net
Receivables
3/27/2013 9:14:52 PM
Companies record losses as a result of customers not paying accounts
receivable as a bad debt expense. Once unpaid bills are consitered a bad debt
expense, the loss is accounted for by writing it off or by using an allowance
method. Although many lengths are taken to properly reciew and evaluate a
companies ability to pay their bills properly, it is an inevitable risk that
businesses face that some customers will not be able to pay what they owe.
Because of this businesses usually establish a percentage of receivables that
they foresee as possibly being uncollectible, this gives the business a more
accurate idea of real revenue and income projections.
This notion of uncollectible income is something that i deal with monthly at
work. In the company that i am employed with, once a customer has not paid
in over 100 days after receiving material, the amount receivable is submitted
to a collections agency and is temporarily recorded as a bad debt expense. If it
is recovered then the receivable is moved to other various GLs less the fees of
the collection agency. If it is not recovered we proceed to the write off
procedures.
RE:
Welcome to
week 4
Nikita Stepp
threaded
discussions!
3/31/2013 11:06:13 PM
It depends if a company uses cash basis or accrual basis accounting
practices.In the cash basis the books would show the transaction only if the
company received the cash. Under the accrual basis the company recognizes
the sales and the time of transaction. Thus it could take a while to reflect the
bed debt. Many proactive and recognizing that this could happen would be
idea.
TO
CLASS PLEASE
READ TO
CLASS Mid-term
exam
practice
Professor Wilson
3/26/2013 7:03:40 AM
Class,
Thanks for the postings thus far this week. I am now posting a problem to provide
practice for mid-term exam.
The Midterm needs to be completed by this Sunday March 31at 11:59PM Mountain
time. A study guide is available in Doc Sharing.
Please attempt Problem 5-4A at the bottom of page 263 and top of page 264 of your
book. You can attach your spreadsheet or Word document with your attempt at this
problem.
I will share the solution by Thursday evening.
I look forward to your attempts.
Prof Wilson
RE: TO
CLASS PLEASE
READ TO
Rachid Khalfaoui
CLASS Mid-term
exam
practice
3/26/2013 4:36:20 PM
Hi Pr Wilson and class,
Here is my answer to the problem P5-4A page 263-264.
Rachid
Problem 5-4A-Rachid.xlsx
RE: TO
CLASS PLEASE
READ TO
CLASS - Geri Waldbillig
Midterm
exam
practice
3/26/2013 6:05:32 PM
Rachid, I have to thank you. I was not able to find my error. I was
going to post my answer with the incorrect answer but upon
reviewing your answer I was able to find my error. I had a question
mark in regard to the gain on disposal of plant assets and discovered
that was my problem. I did not add it in. Once again thank you
I added the ratio calculations at the bottom of my income statement.
problem 5-4A.xls
RE: TO
CLASS PLEASE
READ TO
Jessica Dallek
CLASS Mid-term
exam
practice
3/26/2013 6:10:55 PM
Good evening class,
Please find my answer to 5-4 A attached.
Dallek.Exer.5-4A.xlsx
RE: TO
CLASS PLEASE
READ TO
CLASS - Professor Wilson
Midterm
exam
practice
3/27/2013 7:28:21 AM
Rachid/Geri/Jessica (and rest of the class),
Thanks for the posting and your solution to the problem. Good job!
Rest of the class - please continue with postings for this problem I
will post solution tomorrow once we have more students attempt to
complete the problem.
Prof Wilson
RE: TO
CLASS PLEASE
READ TO
Makiko Kishida
CLASS Mid-term
exam
practice
3/27/2013 9:39:18 AM
Prof Wilson, Class,
Please find my attempt attached.
P5-4A pg263 Kishida.xlsx
RE: TO
CLASS PLEASE
READ TO
Vi Nguyen
CLASS Mid-term
exam
practice
3/27/2013 6:11:57 PM
Here is my spreadsheet.
Chapman DS.xlsx
RE: TO
CLASS PLEASE
READ TO
Kelly Stewart
CLASS Mid-term
exam
practice
3/27/2013 10:02:30 PM
Please see attached income statement and retained earnings
5-4a.xlsx
RE: TO
CLASS PLEASE
READ TO
Zach Monroe
CLASS Mid-term
exam
practice
Please see the attached spreadsheet. Thanks!
Zach Monroe Question P5-4A.xlsx
3/27/2013 11:47:48 PM
RE: TO
CLASS PLEASE
READ TO
CLASS - Professor Wilson
Midterm
exam
practice
3/28/2013 7:14:50 AM
Zach, et al (and rest of the class),
Thanks for the postings on mid-term practice problem. Please find
attached solution for your review. Prof Wilson
Problem_5-4A.xlsx
TO
CLASS PLEASE
READ TO
CLASS credit
policy
Professor Wilson
3/27/2013 7:29:05 AM
Class,
Thanks for the postings thus far in week 4. As we continue our discussion on
receivables, let's discuss a company's credit policy and its impact on collectibility of
receivables.
What is the difference between a tight and loose credit policy? What is the likelihood
effect of each type of policy on the receivables turnover and average collection period
ratios?
Prof Wilson
RE: TO
CLASS PLEASE
READ - Jessica Dallek
TO
CLASS -
3/27/2013 10:27:37 AM
credit
policy
A company's credit policy can have a huge impact on it's collectibility of
receivables. The issue that comes to mind first with regards to credit is the
housing/mortgage industry over the last 5-10 years. Banks issued mortgage
loans to almost anyone. It didn't matter if the potential buyer was risky,
buyers and loan officers found a way around many of the credit policies,
probably considered a loose policy, and provided arms to many buyers who
would not be able to afford their notes in 3-5 years. It literally created a
crisis, with home values plummiting and borrowers having to short sale or
declare bancruptcy. I can only imagine the continued impact this will have
on banks and mortgages in the years to come.
Thefore, a loose credit policy is where a company does not have strict
guidelines as to whom they issue credit. On the other hand a tight credit
policy could include issuing credit to customers after an extensive
"background" check of credit history. All the more, each has an impact on
accounts receivables and turnovers. Having a loose policy, companies run the
risk of having to write-off their receivables accounts to uncollectables.
Having a tight policy would mean the likelihood of being able to have higher
cash payments on receivable accounts. Typically collection periods are 30
days, at least for my job. Most terms are net 30 as this is pretty standard
across industries. Companies can offer incentives for earlier payments such
as a discount. Either way, it is important for management to review and
analyze receivable turnover and collection periods because receivables is an
important asset as it is liquid and will convert to cash more quickly than other
assets. Careful analysis of these factors will contribute to a more profitable
company, especially if managment deems that change is necessary such as
tightening credit policies or changing collection periods.
RE: TO
CLASS PLEASE
READ Makiko Kishida
TO
CLASS credit
policy
3/27/2013 2:42:01 PM
Modified:3/27/2013 2:43 PM
Prof Wilson, Class,
A tight credit policy makes it more difficult for companies to loan/borrow
money as opposed to a loose credit policy that makes it easier. Jessica's
example is excellent in illustrating the loose credit policies during the housing
boom, where a housekeeper making $50k a year could get a loan for over half
a million dollars. Of course loose credit was not the only thing allowing for
this to happen, but it was a huge contributing factor.
In a tight credit environment, only the most qualified companies/individuals
would be issued credit making it more likely for payment to be made on-time.
Therefore, in this situation, the receivables turnover would show a larger
percentage, and the average collection period would be smaller/shorter.
In a loose credit environment, as an extreme example, anyone who applies for
credit would be approved. This would make it more likely that payments
wouldn't be made on-time causing the receivable turnover to show a smaller
percentage and the average collection period to be larger/longer.
RE: TO
CLASS PLEASE
READ Rachid Khalfaoui
TO
CLASS credit
policy
3/27/2013 5:25:11 PM
Hi Pr Wilson and class,
The types of credit management are various. This is linked to the way they analyse and
approve on how to run a business. A company may choose a tight or loose approach to credit.
- A tight is a conservative approach. The goal is to limit and reduce the likelihood of bad debt
and default. Companies check the past due balances and limit the credit. The credit
department follow strict rules and procedures for the selection. The company is fully
protected through signed documents. The risk is low. This is the case of companies that do
not have a lot of working capital.
- A loose approach is less restrictive. Credit department makes sure that the customers have
the opportunity and are able to pay. there are not credit check and investigation in past
account balances. Companies have a high risk in the form of bad debt or hindered cash flow.
There is also the empowerment type of credit management where the credit department has
the ability to make decision about the credit worthiness. Another type of credit management
involves making a business decision.
Rachid
RE: TO
CLASS PLEASE
READ Geri Waldbillig
TO
CLASS credit
policy
3/27/2013 6:52:49 PM
Tight credit is when a company does not extend a competitive payback period
for customers in an effort to receive payment within a short period of time.
Loose credit allows the customer an extended period of time to repay services
or products bought on credit.
Receivables turnover ratio “measures the number of times, on average, a
company collects receivables during the period.” (1)
The average collection period ratio measures the average amount of days it
takes to collect receivables.
If the collection policy is too tight the receivables turnover ratio may increase
and the average collection period ratio may decrease however, this policy
may cause customers to take their business to a company with a more liberal
collection policy and therefore, cause a decrease in net sales.
On the other hand if the collection policy is too loose the receivables turnover
ratio may slow along with an increase in the average number of days to
collect. This causes the company to be without cash needed for operating
expenses.
(1) Kimmel, Weygandt, and Kieso, Financial Accounting-Tools for Business
Decision-Making 6th edition © 2009 New York: John Wiley & Sons, Inc.
RE: TO
CLASS PLEASE
READ Kaswelda Carter
TO
CLASS credit
policy
3/27/2013 7:29:40 PM
The difference in a tight policy in a company is that they could lose sells
because they have to many guidelines to go through for a customer to get any
credit from them. The company have high expectations for people when it
comes to their credit and do background checks on them as well from a
financial standpoint.
If a company has a loose policy they may lend to people that have no
intentions on paying them back and this can also make a company lose sells
as well. People that didn't have a high credit score would have a big spending
range to purchase items. These people go from place to place and don't pay
back.
RE: TO
CLASS PLEASE
READ Tia Miller
TO
CLASS credit
policy
3/27/2013 9:46:28 PM
A loose credit policy means that a company is generous with their credit and
will increase sales. A tight credit policy means that a company seldom gives
credit and runs the risk of losing sales.
Companies that have a policy that is too loose may sell to deadbeats that will
pay late or not at all. The average collection period ratio and the receivables
turnover ratio will be high because the companies will have a hard time
collecting from the deadbeats. Of course, these ratios will be low with tight
credit policies. The customer who make it in normally pays on time.
RE: TO
CLASS PLEASE
READ Kelly Stewart
TO
CLASS credit
policy
3/28/2013 12:46:32 AM
The difference between a tight and loose credit policy is that a tight policy
will have strict restraints in extending credit to a potential or existing
customer and a loose policy is more flexible in determining credit terms for a
customer. Too tight of a method may discourage high sales and may even
restrict a customers potential to be a profitable contributor. Too loose of
policies may result in uncollectable receivables or too high of average days to
pay.
An asset receivables turnover represents the sales divided by average net
receivables, it measures the number of times a company collects receivables
durning the period. A tight policy may increase this turnover ratio because
better financially fit companies will be given terms and be able to deliver
payment within those terms. A loose policy may lower this turnover due to
slower pay.
Average collection period represents the number of days in a year divided by
the receivable turnover ratio. A tight credit policy will result in a better
collection period ratio because collection will not exceed the terms period. A
loose policy will result in a more poor collection period due to payment
outside of the established terms.
All of this being said, too tight or too loose of policies can discourage
customers from continuing business, or result in high bad debt expenses. A
flexible yet sensible approach to credit policies is ideal.
RE: TO
CLASS PLEASE
READ Darnell Flax
TO
CLASS credit
policy
3/28/2013 12:56:25 AM
Loose credit policy is A central bank policy designed to stimulate economic
growth by lowering short term interest rates, making money less expensive to
borrow. (tight money policy)
Tight Monetary policy that is characterized by high or increasing interest
rates. The Federal Reserve Board uses a tight monetary policy in order to
contain inflation, which can be very damaging to an economy.
source: http://invest.yourdictionary.com/tight-credit
RE: TO
CLASS PLEASE
READ Professor Wilson
TO
CLASS credit
policy
3/28/2013 7:15:36 AM
Darnell, et al (and rest of the class),
Thanks for the postings. Good response on impact to tight or loose
policy - can you also tell me how this impacts the receivables
turnover and average collection period ratios?
Prof Wilson
RE: TO
CLASS PLEASE
READ Jessica Dallek
TO
CLASS credit
policy
3/28/2013 4:52:49 PM
http://www.zenwealth.com/BusinessFinanceOnline/RA/AssetManagementRatios.html
I found this link that reviews the ratios that we learned last week, this week, and also
ones for fixed assets which I think we learn next week. Anyway, good review and
explanation of these ratios. The credit policies of a company can impact these ratios.
Having loose policies could signify lower turnover rates and longer collection
periods. The reverse could be true for tight policies which could signify higher
turnover and shorter collection periods, but in the end there could be an impact on
sales and profitability, which could be reduced because too tight of policy would
reduce the number of people that could pay with credit. It's all about finding a happy
medium...
RE: TO
CLASS PLEASE
READ Darnell Flax
TO
CLASS credit
policy
3/29/2013 7:28:16 PM
Receivables turnover ratio measures company's efficiency
in collecting its sales on credit and collection policies.
Source:
http://www.ccdconsultants.com/documentation/financialratios/receivables-turnover-ratio-interpretation.html
where as High ratio shows that the company operates on a
cash basis or that they are somewhat Okay on their credit
and collections.
on the other hand low ratios that they are having a hard time
with their credit policy.
RE: TO
CLASS PLEASE
READ Elizabeth Smith
TO
CLASS credit
policy
3/30/2013 10:55:33
AM
The monetary policy is implemented by the Federal Reserve. It influences the
amount of money available to consumers and businesses.
Tight credit policy is more on the reserve side; it increases the reserve requirements
for one to borrow money from the bank. This helps decrease the likelihood of
consumers defaulting on their loans but decrease economic growth.
Loose credit policy is more “expansive.” It decreases the reserve requirements for
one to borrow money. The bank also gives more discounted rate. This increases the
likelihood of consumers to default on their loans but increase economic growth.
http://smallbusiness.chron.com/distinguish-between-tight-loose-monetary-policy3872.html
RE: TO
CLASS PLEASE
READ Elizabeth Smith
TO
CLASS credit
policy
3/30/2013 10:57:39
AM
Receivables turnover rate shows how often a company receives payment in a given
financial year. The variant of this receivable turnover ratio is average collection
period ratio. Below are the formula used:
Receivable Turnover Ratio: Credit Sales/ Average debtors + average bills receivables
Average collection period = 365 days or 12 months/ receivable turnover ratio.
RE: TO
Justin Noel
3/28/2013 3:33:39 PM
CLASS PLEASE
READ TO
CLASS credit
policy
Whether a company sells products and services on account (A/R) or accepts a Note
as payment, the objective is the same - to increase sales by extending credit to
customers. When a company extends credit, it is taking a default risk that must be
managed by a sound credit policy. Lowering credit standards can increase sales but
can also present collection problems to the extent that some incremental sales are
not profitable, because your default rate becomes so high that in the end you loose
money on all of those sales. In the end there has to be a balance of credit and sales
that works for a organization.
In some businesses, it is not practical to collect money from the customer when the
service is provided. For example, a water company does not know what a customer
owes until after the fact when the read the meter. They have to bill customers and
then hope the customer will be able to pay. Some organizations like this in order to
mitigate these risks require deposits. This means that some customers would be a
lot less likely to use these types of services, however if they are essential they have
got you no matter what.
RE: TO
CLASS PLEASE
READ Stacy Davis-Green
TO
CLASS credit
policy
3/30/2013 12:34:06 PM
The difference between a tight and loose credit policy, is that a tight credit
policy is a more conservative type of credit management where the most
focus is placed on offering credit but also reducing or limiting the likelihood
of loan default so credit worthiness thru credit history reports is the main
source for decisions. Loose credit policy doesnt follow written policies and
procedures with respect to lending activities, and its not so much based on
credit,its just a matter of being able to show that credit can be repaid. The
likelihood effect of each type of policy on the receivables are different, the
tight credit policy should show a higher collection rate as oppose to the loose
credit policy.
RE: TO
CLASS - Sara Rinaldo
PLEASE
3/31/2013 4:57:49 PM
READ TO
CLASS credit
policy
Modified:3/31/2013 5:06 PM
Managing receivables means managing to whom a company extends credit.
A loose credit policy means the requirements to be approved for credit are
minimal. A tight credit policy means the requirements to be approved for
credit are stringent. If a credit policy is too loose, you may extend credit to
too many people who don't have the means to repay their debt. If your credit
policy is too tight, you may miss out on sales opportunities. This is why the
credit policy should not be too loose or too tight, but somewhere in the
middle.
It is likely that with a loose credit policy, the receivables turnover will be
lower and the average period will be longer. With a tight credit policy, the
receivables turnover would be higher and the average period would be
shorter.
RE: TO
CLASS PLEASE
READ Kristin Muchowski
TO
CLASS credit
policy
3/31/2013 7:24:04 PM
Modified:3/31/2013 7:24 PM
Step 1
Study the basics of monetary policy. The Federal Reserve pays close attention
to the health of the economy as a whole and implements monetary policy to
help increase the money supply during a downturn and restrict the money
supply during periods of excessive growth. Monetary policy actions include
those related to reserve requirements, discount rates and transactions
involving government securities.
Step 2
Analyze the implications of tight monetary policy. Tight, or contractionary,
monetary policy seeks to slow economic growth to head off inflation. The
Federal Reserve might increase reserve requirements, the amount of money
banks must hold to cover deposits, and increase the discount rate, the rate
charged to banks which borrow money to cover reserve requirements. Due to
an increase in the cost of borrowing money for banks, banks tend to hold
money to avoid having to borrow. Actions such as these will result in reduced
money supply and restrictions on credit availability for small businesses and
consumers alike. Reduced credit and funds availability have an impact on the
ability of businesses to expand and hire additional workers.
Step 3
Examine the implications of loose monetary policy. Loose, or expansionary,
monetary policy seeks to stimulate production and employment through an
increase in the availability of money and credit in the marketplace. Reducing
the discount rate or reserve requirements provides banks with an incentive to
loan money and make credit available. With the implementation of loose
monetary policy, small businesses benefit from expanded credit opportunities,
leading to increased investment, production and employment options.
Step 4
Make the distinction between periods of tight and loose monetary policy.
Look at current interest rates to determine if current monetary policy is tight
or loose. Increasing interest rates on loans and credit opportunities represent a
period of tightening monetary policy, while decreasing interest rates represent
a period of loosening monetary policy. Small businesses looking to expand
and invest are better served by taking advantage of the lower interest rates
which mark the implementation of expansionary monetary policy.
Source: http://smallbusiness.chron.com/distinguish-between-tight-loosemonetary-policy-3872.html
Accounts
Receivable
Kimberly Warren
3/27/2013 6:46:20 PM
Companies have to accept the fact that a certain percentage of companies will not pay
their invoices.
Most companies I have worked for usually use around 10%. The company I work for
right now is much higher because they do not invoice their customers promptly. The
longer they wait to invoice the longer the companies will take to pay. So, not only do
they have 10% of no payment they have 30% over 90 days old because they waited
over 60 days to invoice. Invoices should be written within 7 days in order to receive
prompt payment.
TO CLASS
- PLEASE
Professor Wilson
READ TO CLASS
3/28/2013 7:16:46 AM
- SOX
reporting
Class,
Thanks for the postings and continued hard work in the threads!!
As we continue with week 4 of class, please consider the following (along with
problem I just mentioned in previous posting):
How has Sarbanes-Oxley Act of 2002 given added importance to the internal control
over financial reporting?
Prof Wilson
RE: TO
CLASS PLEASE
READ David Neville
TO
CLASS SOX
reporting
3/28/2013 7:57:06 AM
The SOX act of 2002 was passed by congress because of the fraudulent
financial reporting done by executives( like ENRON) which made companies
look more financially stable than they really were and cost the public a lot of
money when the company went bankrupt.. The act places the responsibility
on the executives to report accurately on the financial status of a company
and will be held liable if found misleading the public. This added requirement
and responsibility to internal control has protected the public from the lying
executive scum!
RE: TO
CLASS PLEASE
READ Vi Nguyen
TO
CLASS SOX
reporting
3/28/2013 12:20:56 PM
The Act mandates companies include their financial reports for public view.
It gives the public an opportunity to evaluate the company and internal
control before making a decision to invest or not. By making it mandatory to
include financial reports, it is easier to detect fraudulence and scandals
through auditing.
RE: TO
CLASS PLEASE
READ Tia Miller
TO
CLASS SOX
reporting
3/28/2013 3:29:37 PM
The Sarbanes-Oxley Act holds corporate executives and board of directors at
publicly traded companies responsible for controls. This makes internal
control more important to companies because the higher ups are now legally
responsible for its effectiveness and implementation. Independent auditors are
also held accountable for the adequacy of the controls so with this many
people involved, that can basically get into trouble, the public can feel more
at ease knowing that the financial statement that they are reading is reliable or
for example a client at a financial institution can feel comfortable knowing
that their financial information is secure as humanly possible.
RE: TO
CLASS PLEASE
READ Jessica Dallek
TO
CLASS SOX
reporting
3/28/2013 5:02:13 PM
I agree with Tia... SOX put the responsibility of integrity back in the
hands of publicly owned companies to benefit the public, including
investors, clients, customers, etc. It may seem tedious to implement
all these controls, but I certainly would want to do everything I could
to assure my employees, investors, customers, taxing agencies,
federal authorities, that my company would be run under these
guidelines. Why run a shady company? Violations of SOX could
result in jail time. Being as transparent as possible and running the
company with tight controls and policies will ensure that the
company at least has integrity regardless of profits.
RE: TO
CLASS -
Rachid Khalfaoui
3/28/2013 6:09:13 PM
PLEASE
READ TO
CLASS SOX
reporting
Hi Pr Wilson and class,
The 2002 law on the reform of the company accounting and investor protection is a federal
law passed by Congress, imposing new rules on accounting and financial transparency. The
text is commonly known as "Sarbanes-Oxley", the name of its sponsors: Senator Paul
Sarbanes and MP Mike Oxley. This law aims to increase the struggle against fraudulent and
deviant behavior of companies. Following the bankruptcies of large companies such as Enron
and WorldCom, trauma is installed in the population resulting in the loss of consumer
confidence in the capitalist system. Thousands of investors have lost their life savings due to
these fraudulent behaviors. This law was passed in this context to cope with this threat. It
strengthens the internal control of companies by allowing the Securities and Exchange
Commission (SEC) to verify the correct behavior of companies at least once every three
years. It also increases the importance of internal control by sanctions. The law specifies the
penalties brought against companies that do not comply with the law (falsification. ...). It
also requires to implement internal control based on a conceptual framework. In practice, the
COSO framework is the most widely used.
Source: http://en.wikipedia.org/wiki/Sarbanes%E2%80%93Oxley_Act
Rachid
RE: TO
CLASS PLEASE
READ Makiko Kishida
TO
CLASS SOX
reporting
3/29/2013 11:20:16 AM
Prof. Wilson, Class,
The Sarbanes-Oxley Act of 2002 created requirements of additional internal
controls that require top management to personally certify that their financial
statements are correct. In this way, the SOX Act put the responsibility of the
accuracy of an organizations' financial statements on management.
Independent auditors were made more accountable on the accuracy of
financial statements as well. This Act was created in response to several high
profile fraud cases at the time (Enron, WorldCom, Adelphia).
RE: TO
CLASS -
Kelly Stewart
3/29/2013 8:48:38 PM
PLEASE
READ TO
CLASS SOX
reporting
The SOX act raised expectations and requirement for adequate systems of
internal control. This is monitored and evaluated by the periodic presence of
auditors that attest to the relevancy and adequacy of the internal controls set
by a business. Investors are much more likely to invest in a company that
they trust. SOX act requirements provide this confidence to shareholders that
financial records are accurately represented. The Sox act protects investors
from fraudulent accounting disclosures which would likely sway the actions
of investors in a way to benefit the business at stake. The act also requires
management to put in place valuable internal controls that will help prevent
any fraudulent activity within the company. Failure to meet the requirements
of internal controls provided by the SOX act result in the violation of
regulations set by this act and discredit the financial accounting accuracy of
the business. The act promotes, requires, and forces businesses to have
correct internal controls to protect it's shareholders.
The reaction to the SOX act vary among businesses. Some companies dislike
the SOX act because it is often expensive and time consuming, especially if a
business is running itself the way it should be. Many businesses, however,
benefit from the requirements set in place by the SOX act as it may improve
current internal controls and improve efficiency in the accounting process.
RE: TO
CLASS PLEASE
READ Kaswelda Carter
TO
CLASS SOX
reporting
3/29/2013 9:11:45 PM
Sarbanes-Oxley Act provides measures that help ensure that fraud will not
occur. This act was passed by Congress and put in place to reduce unethical
corporate behavior and decrease the likelihood of future corporate scandals.
Sarbanes-Oxley Act has increased the independence of the outside auditors
who review the accuracy of corporate financial statements.
RE: TO
CLASS PLEASE
Elizabeth Smith
3/30/2013 10:56:30 AM
READ TO
CLASS SOX
reporting
The Sarbanes-Oxley Act of 2002 was created to tight internal controls over financial reporting. SOX prevents
mis-statements and errors due to frauds. This keeps everyone from management to employees ethical.
http://smallbusiness.chron.com/sarbanes-oxley-act-2002-affect-small-business-owners-877.html
TO CLASS PLEASE
READ - TO
Professor Wilson
CLASS Selling
Receivables
3/29/2013 6:58:06 AM
Class,
Thanks for the postings this week. As we head into the 4th weeknd of class, let's
discuss receivables and concept of selling them.
Why do companies sell their receivables?
Do you think that companies may be rushing to sell their receivables to improve their
cash position on the balance sheet because cash makes the balance sheet look good?
Why may this be short-term gain for long-term loss?
Prof Wilson
RE: TO
CLASS PLEASE
READ - TO Jessica Dallek
CLASS Selling
Receivables
3/29/2013 11:47:36 AM
Good morning class and Prof Wilson,
Companies sell their receivables for cash. In some instances, this could be
the most liquid way to convert their A/R to cash. Companies could sell them
because of size and because maintaining receivables can prove costly in that
they have to write them off and the monitoring of these accounts can be
tedious.
Some companies probably do rush to sell their receivables because they are
low on cash or unable to obtain loans from creditors, so to make money fast
they sell and/or factor their receivables. However, by selling their
receivables, they are not necessarily displaying long-term accurate details of
their assets and equities, especially when it comes to matching the sales with
cost to operate the company.
I found a great article on factoring: http://www.businessweek.com/smallbusiness/more-small-businesses-are-selling-receivables-at-a-loss09272011.html definitely helped me realize the real-world relationship to
this concept.
RE: TO
CLASS PLEASE
READ - TO Justin Noel
CLASS Selling
Receivables
3/29/2013 2:47:19 PM
Because at some point some money is better than no money. Once debt gets
and stays bad for to long a organization must come to a point were even
though it is owed and they are entitled to it, mitigating that risk to another
firm because prudent. It is like in sales 100% of nothing is always worse that
1% of a $1.00. In most cases this dept is sold for around 20 to 20 percent and
means that while taking a lose it is not the full loss that it can be.
RE: TO
CLASS PLEASE
READ - TO Tia Miller
CLASS Selling
Receivables
3/29/2013 6:27:44 PM
Receivables such as notes receivables gives the holder a strong legal claim
and promissory notes are negotiable instruments so the seller can transfer
them to another party by endorsement. If the seller knows that they probably
won't collect, they can sell the receivables to make some kind of profit.
Another reason for selling is that billing and collection are often time
consuming as well as costly.
Sure, a company may rush to sell them to accelerate cash receipts to improve
their position but if that's the reason for selling, it's really only a short-term
gain. The company will need to evaluate why they need to take this route and
re-evaluate to whom as well as how they extend credit.
RE: TO
CLASS PLEASE
READ - TO Rachid Khalfaoui
CLASS Selling
Receivables
3/29/2013 9:05:05 PM
Pr Wilson and class,
When a company needs cash before customers pay their account balance and
they don’t want to get a bank loan, they sell their accounts receivables to
another company that is responsible for collecting the money. This
transaction is called the "factoring". And companies that buy the receivables
are called the "factors".
There are some disadvantages to sell receivables. Selling receivable is a sign
of weaknesses of the company. It hurts the net income and the shareholders’
equity and the company needs to recognize that’s a loss. It’s also a negative
message for creditors and investors. Selling receivables may also hurt
customers because the company is in need of cash, so they will be harassed to
pay their bills as soon as possible.
Rachid
RE: TO
CLASS PLEASE
READ - TO Kelly Stewart
CLASS Selling
Receivables
3/29/2013 10:13:02 PM
Companies sell their receivables "in order to accelerate the receipt of cash
from receivables" (site: course text book). Common reasons companies do
this are size, limited access cash, and because collection and billing are both
costly and time consuming. When it comes to size, many businesses choose
to have a financing provider to extend credit to its customers. These captive
finance companies promote the ability to finance or extend credit to potential
customers, making the goods sold more readily available and affordable to
the customers. Sales of receivables may also take place simply due to lack of
other options to increase cash. Often times interest rates or the cost of
borrowing are more expensive than selling receivables, or may not even be an
option due to poor credit. Many businesses do not have the proper
knowledge, time, employees, or funds to engage in the collections and billing
processes. In cases such as these outsourcing this job to companies that
specialize in these arenas may be a profitable option.
Companies may rush the sale of their receivables to improve their cash
position. This is a quick way to gain cash, however, selling their receivables
for cash causes long term income to virtually disappear. The short term gain
of cash from the sale of receivables increases assets initially, but often effects
the long term assets in a negative way because future income from operations
have already been sold.
RE: TO
CLASS PLEASE
READ - TO Lisa Childs
CLASS Selling
Receivables
3/29/2013 11:05:06 PM
Companies sell their receivables to reduce the risk of loss from nonpayment.
The idea is that they are better receiving some cash then none. They may also
need the cash and lack the credit to be able to obtain a loan from the bank. It
would be a short term gain because they have that quick influx of cash, but in
the long term they are shorting their capitol by only receiving partial
payments of the AR.
RE: TO
CLASS PLEASE
READ Professor Wilson
TO CLASS
- Selling
Receivables
3/30/2013 7:11:10 AM
Lisa, et al (and rest of the class),
Thanks for the postings and discussions regarding Selling
Receivables. As we continue through the 4th weekend of class, let's
consider some more questions regarding receivables:
Does everybody understand what factoring is? Also, is there a
difference between the terms assigning of receivables and factoring
of receivables? Or are they the same? Anybody??
What are the pros and cons of factoring?
Prof Wilson
RE: TO
CLASS PLEASE
READ Zach Monroe
TO CLASS
- Selling
Receivables
3/30/2013 1:34:32 PM
Factoring is essentially a company selling its accounts
receivable at a discount to another company. So one
company might have an accounts receivable of $100,000
and sell it to another company for $85,000, to get $85,000 in
necessary cash. This is typically done when the company
selling the accounts receivable needs cash to cover their
obligations or if they simply have quite a few accounts
receivable and would rather sell some of them at a discount
than deal with the processing of all of them. I think there is
a difference between factoring and assigning of receivables.
Whereas factoring is about selling accounts receivable for
needed cash, assigning accounts receivable is more of a
lending agreement. Typically with assigning receivables a
company will assign some receivables to a lender for a cash
advance. So the company borrowing the money gets the
cash advance and pays interest and any service charges on
the loan and the lender gets a percentage of the receivables.
RE: TO
CLASS PLEASE
READ Joshua Roque
TO CLASS
- Selling
Receivables
3/30/2013 4:24:54
PM
I am a little confused regarding receivable and the
role within accounting. Zach, you indicated that a
company may have an AC of 100,000 and can sell it
to another company. for necessary cash, I
understand that part but what occurs with the
additional 15,000 that was not received at the initial
time of purchase? Is this something that really only
occurs when a company is trying to cover
something? Is there any upside on this? From the
readings and what others have posted on the topic, I
would think that there are more cons than pros
because there are not only charges that will arise
from factoring, but moreover, there is money that is
not being received or paid. The company will seem
to be losing money than actually receiving the
amount that they are suppose to get as indicated in
Zach's example of the initial 100,000. Again, not
sure about this but any help would be much
appreciated.
RE: TO
CLASS PLEASE
READ Jessica Dallek
TO CLASS
- Selling
Receivables
3/30/2013 9:48:15
PM
Joshua,
I would think that even though the
company would be losing the $15,000 in
service charge to the factor, they are likely
to gain more cash than if they had to write
off the receivables, so in the end it would
be worth the service charge...
RE: TO
CLASS PLEASE
READ Zach Monroe
TO CLASS
- Selling
Receivables
3/31/2013 5:11:30
PM
As I understand it, and please anyone else
that's more qualified to answer this one,
please jump in - but as I understand it there
are a couple of reasons a company might
take this option. The first one is if they
simply need cash now to cover their bills
because they don't have enough liquidity to
do so. Even though they are selling the
receivables for less than what they're
worth, I believe the advantage is that they
are receiving cash free of any service
charges or interest. If the company took
out a loan to cover their obligations then
they will certainly have to pay service fees
and interest, so by selling the receivables
they are likely getting more cash than they
would if they took out a loan, thus saving
them money. I think looking at it from that
angle makes it a bit more palatable than the
fact that in the example in my previous
post they are losing $15,000. If say they
had to pay $20,000 in interest (these
numbers probably don't match up but for
the sake of the example) and fees on a loan
then losing $15,000 on factoring is actually
the best move, if you consider that they
have to do one or the other to cover their
obligations.
The other reason might be for a large
company with an incredibly large amount
of receivables; it might actually save them
money on processing the receivables if
they take the most high risk accounts and
factor them. So by selling the accounts at a
discount of $15,000, they may actually
save money if it's going to cost them
$20,000 to work the accounts and collect
on them. Some companies actually operate
like this regularly as a means of mitigating
risk, saving money, and remaining more
liquid and agile.
RE: TO
CLASS PLEASE
READ David Neville
TO CLASS
- Selling
Receivables
3/30/2013 2:51:18 PM
Here is a good explanation of factoring"factoring is the outright sale of a firm's accounts receivable
to another party (the factor) without recourse, which means
the factor must bear the risk of collection. Some banks and
commercial finance companies factor (buy) accounts
receivable. The purchase is made at a discount from the
account's value. Customers either remit directly to the factor
(notification basis) or indirectly through the seller (nonnotification basis)."
assignment of accounts receivable Definition | Business
Dictionaries ...
http://www.allbusiness.com/glossaries/assignmentaccounts-receivable/4942968-1.html - 47k -
RE: TO
CLASS PLEASE
READ Darnell Flax
TO CLASS
- Selling
Receivables
3/30/2013 7:05:48 PM
Factoring is when a business sells it accounts receivable to a
third party at a discount.
Yes, they are some what the same, but may be recorded
differently
The pros of factoring would be that you get the money up
front and less hassle trying to get it from the person that
owes it
Cons will be that you lose some money selling at a
discounted price and it can also be expensive.
RE: TO
CLASS PLEASE
READ Rachid Khalfaoui
TO CLASS
- Selling
Receivables
3/30/2013 8:28:03 PM
Pr Wilson and class,
Factoring is a process of outsourcing administrative tasks, insurance
against bad debts and short-term financing. Factoring is a transaction or
financial management technique: a credit institution specialized supports
recovery of debts of a company under a contract. Factoring involves
three benefits that can be all subscribed or not by the company:
-The collection of receivables: The factor manages the recovery of
debtors in default of payment, receipts and ensures the legal service in
case of non-payment.
- Financing Cash: The factor transfers the amount of debts as soon as
they are surrendered by the customer.
- Credit Insurance: The delegation of the contract.
The factor blocks an amount of receivables to establish a guarantee fund
that he can use to cope with debts, with disputes that have resulted in a
legal case, or for any possible right of pre-emption . The amount blocked
is proportional to the amount of receivables and it’s returned to the
expiration of the contract.
Source: http://en.wikipedia.org/wiki/Factoring_(finance)
Rachid
RE: TO
CLASS PLEASE
READ Jessica Dallek
TO CLASS
- Selling
Receivables
3/30/2013 9:46:02 PM
Factoring is selling receivables to a company that specializes
in the collection of payments from customers. Factoring
receivables and selling receivables can be the same, but can
also be different. For example, credit card companies can be
factors for retailers, but retailers could also sell their
receivables off to another company for quicker cash due to
size, etc. Factor companies will likely charge a service fee,
so that when you sell the receivable you also have to account
for the charge that the factor will impose for obtaining the
receivable from you.
RE: TO
CLASS PLEASE
READ Professor Wilson
TO CLASS
- Selling
Receivables
3/31/2013 6:12:50
AM
Jessica, et al (and rest of the class),
Thanks for the postings and discussion regarding
the selling of receviables. What are some ways
company can speed up their collection of
receivables without having to sell to 3rd party?
Prof Wilson
- Selling
Receivables Kimberly Warren
3/31/2013 9:25:32
AM
Be tighter on credit lending, cut off the
products until the company receives
payment and provide assets to back up
credit lines.
RE: Selling
Joshua Roque
Receivables
3/31/2013
12:13:54 PM
Companies could request their
lines have a smaller value and
thus, this will eliminate the need to
have to wait for large credit
balances to be paid. In addition, as
Kimberly indicated earlier, by
having a tighter hold on credit
lending, it will require companies
to pay back their balances and
holds their products from being
distributed to their vendors or
customers. This is something then
that will ensure that those
receivables will be collected
sooner otherwise, their business
might be in danger of losing more
money that it already has.
RE: TO
CLASS PLEASE
READ Makiko Kishida
TO CLASS
- Selling
Receivables
3/31/2013 1:55:16
PM
Hi Prof Wilson, Class,
Companies can offer discounts on those
that pay early, or pay in cash, other
discounts for people that pay upfront, and
as Kimberly said, they can tighten their
credit policies and not offer credit options
to those that are more likely to pay late.
RE: TO
CLASS PLEASE
READ Jessica Dallek
TO CLASS
- Selling
Receivables
3/31/2013 3:21:56
PM
I believe that companies can speed up the
collection of their receivables without
having to sell to a third party by offering
discounts and incentives for earlier turn-in
of payments to customers, monitoring and
following-up with customers on
receivables open for more than 30 days,
reaching out to customers with
correspondence to remind them of past due
payments.
RE: TO
CLASS PLEASE
READ Kelly Stewart
TO CLASS
- Selling
Receivables
3/31/2013 5:01:20
PM
A company can speed up collection of
receivables in many ways. They can
increase the monitoring efforts of current
and possible customers. They may look
deeper into a companies ability to pay
before extending credit to that customer.
Restraints can be made to certain accounts
such as establishing a line of credit to make
sure customers are staying within their
means or ability to pay. Holding pending
orders until payment is received is another
tool to speed up collection of receivables.
Offer rewards such as discounts for early
payment. Determine that some companies
should be on a COD payment basis to
avoid uncollectible receivables or
delinquent payment in the future.
RE: TO
CLASS PLEASE
READ Darnell Flax
TO CLASS
- Selling
Receivables
3/31/2013 8:19:09
PM
They can do things such as call before due
date to inform customers, make it easier for
them to pay you by including prepaid
envelopes, or even having discounts for
those who pay earlier than their due date.
Some companies may want to look into
their policies to make it easier for the
borrowers and themselves.