Financial Analysis, Planning and Forecasting

1、Financial Analysis, Planning and ForecastingTheory and ApplicationByAlice C. LeeSan Francisco State UniversityJohn C. LeeJ.P. Morgan ChaseCheng F. LeeRutgers UniversityChapter 19 Credit Management Outlinev19.1 Introductionv19.2 Trade creditv19.3 The cost of trade creditv19.4 Financial ratios and cre

2、dit analysisv19.5 Credit decision and collection policiesv19.6 Summary19.1 Introduction19.2 Trade credit（19-1）Table 19-1 01NttttARARARARAging of Accounts ReceivableJanuaryFebruaryAccounts Receivable of TotalAccounts Receivable of Total0-30 days 250,00025.0 250,00022.731-60 days500,00050.0525,00047.8

3、61-90 days200,00020.0250,00022.7Over 90 days 50,000 5.0 75,000 6.8Total accounts receivable1,000,000100.01,100,000100.019.3 The cost of trade creditvThe sellers perspectivevThe buyers perspective19.3 The cost of trade credit = Current sales =1 million per year. S = Incremental sales =250,000. V = Va

4、riable 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 =

5、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 firms cost of new capital when the capital is used to finance receivables.

6、= 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).0S0ACPNACP19.3 The cost of trade credit(19-2)(increased i

7、nvestment in receivables associated with original sales) (additional investment in receivables associated with new sales) (change in collection period)(old sales per day)I 00() (incremental sales per day) 3603601,000,000250,000 3020.7 30360360 42,361NNNV ACPSSACPACPV ACP19.3The cost of trade credit（

8、19-3） （19-4） new salescontribution margincost of carrying new receivables 1 $ 250,000(.3).12(42,361) $ 69,917PSVkI new salescontribution margincost of carrying new receivables(bad-debt losses) 1 $ 250,000(.3).12(42,361).05($ 1,250,000) $ 7.417PSVkIB S 19.4 Financial ratios and credit analysisvFinanc

9、ial ratio analysisvNumerical credit scoringvBenefits of credit-scoring models vOutside sources of credit information 19.4 Financial ratios and credit analysis(19-5)Table 19-2 12iiiYAXBXiYStatus and Index Values of the AccountsAccount NumberAccount Status 7 Bad .8110 Bad .89 2 Bad 1.30 3 Bad1.45 6 Ba

10、d1.6412Good1.7711 Bad1.83 4Good1.96 1Good2.25 8Good2.50 5Good2.61 9Good2.8019.4Financial ratios and credit analysisFigure19-1 Distributions of Good and Bad Accounts1.8312Discriminate Function ValueProbability of Occurrence1.641.771.96BadGood19.4 Financial ratios and credit analysis(19-6) 1 122ijjppF

11、bYb Yb Yb YCredit Score from Scoring ModelCumulative Frequencies“Goods”“Bads” .200 0 0 .208 0 35 .226 2 36 .245 3 40 .356 6 58 .543 16 76 .577 17 82 .596 20 85 .699 34 97 .763 49 99 .898 751001.20010010019.4 Financial ratios and credit analysisFigure 19-2 Key to Dun and Bradstreet Ratings19.5 Credit

12、 decision and collection policiesvCollection policy vFactoring and credit insurance 19.6 Summary The subject of Chapter 19 is the management of trade credit for both buyer and seller. For the buyer, the essential issue is to determine the cost of using trade credit as a form of financing, then compa

13、re this cost with the cost of alternative sources of capital. While some argue that accounts payable have no cost, we support the arguments against this view. That is, for the buyer, trade credit involves opportunity costs in the form of foregone discounts, implicit bankruptcy costs for taking on to

14、o much accounts payable, and costs associated with the timing of taxes and the accounting procedure used. The grantor of trade credit, the seller, has a large array of decisions to make. The first of these we discussed was determining the cost of granting trade credit. Next, we examined a numerical

15、credit-scoring method via linear discriminant analysis to make the credit-granting decision more effective in terms of risk and related collection and bad-debt costs. Finally, we discussed the other aspects of the firms credit policy, including the decision of how much credit to grant, on what terms, and the collection policy procedures to be pursued for delinquent accounts. We noted that the evaluation of various collection policies can be viewed and even carried out in the framework of a capital budgeting problem. Chapter 1