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Articles by Probir Banerjee
Page 2 of 45
How to Calculate Investment in Accounts Receivable (AR)?
What is Accounts Receivable?Although many professionals do not know, accounts receivable is a part of working capital, and it is shown in the balance sheet in the current assets. As this is an investment, AR should be counted as a net realizable value. We get the net realizable value when the AR is adjusted for all costs and deductions from the gross AR itself. These deductions may include, but are not limited to sales discounts, uncollectible balances, allowances, and sales returns.Accounts receivable is an outcome of operations, but many entrepreneurs lose money due to a lack of knowledge of the ...
Read MoreWhat are the Features of Optimum Credit Policy?
Features of Optimum Credit PolicyThe optimum credit policy of an organization represents the best credit efforts to maximize the returns from the use of the policy as a marketing tool. Usually, it depends upon the organization as to how much control over the credit policy must be exerted.A too-tight credit policy will lead to loss of opportunities while a too lenient credit policy may lead to an extension of bad debts. Therefore, an optimum credit policy is required by companies to excel in business operations.The main features of an optimum credit policy are as mentioned below −Credit policy variablesEvaluation of ...
Read MoreWhat are the Costs involved in providing Credit as a Marketing Tool?
Businesses provide credit to their customer for various reasons. In fact, credit can be used as a marketing tool by companies. In order to do so, a company must look at the maximization of profits via incremental sales. However, it is easier said than done.This is so because, in order to use credit as a marketing tool, the companies have to bear the following three types of costs −Production and Sales CostsProduction and selling costs increase with the incremental sales a firm tends to seek.If sales increase within the already existing production capacity, then only variable production and selling costs ...
Read MoreWhat are the Types of Credit Policy Variables?
What are Credit Policy Variables?Credit policy variables are an essential feature of every credit policy. These variables impact the credit policy directly or indirectly. Since the variables have the power to make or break a credit policy they are considered indispensable while forming and executing the credit policy. Management of credit policies requires efficient handling of credit policy variables.The four types of credit policy variables are as follows −Credit StandardsStandards of Credit Policy refer to the offering of credit to particular customers and it is purely institutional in character. A company may decide to grant credit to a company willingly ...
Read MoreWhat are the Three Components of Credit Policy?
Credit Policy: DefinitionCredit policy is mainly dependent on the volume of credit sales and the collection period. The volume of credit policy is a function of a company’s gross sales and the percentage of credit sales to total sales. Total sales of a company depend on many factors, such as market size, market share, quality of products, competition, etc.Companies may sell their products in credit for various reasons, such as gaining more market share and being competitive in the industry. Credit sales create trade debtors or accounts receivables where the seller needs to wait for a certain period for the ...
Read MoreWhat is the Difference between Liquidity and Profitability?
LiquidityThe liquidity and profitability of a company are directly related to the working capital. When a company maintains high temporary working capital in current assets, it is known to be more liquid. The companies that maintain a lower level of working capital are known as less liquid.Companies that maintain higher liquidity and considered to be at lower risk. They are able to meet the needs of the company and their reservoir of current assets lets them have the freedom to stay solvent.However, more liquid companies have lower profitability because their funds are tied up in operations and these funds cannot ...
Read MoreWhat is a Credit Policy?
The credit policy is an important tool to improve the selling efforts of a company. However, before discussing about credit policy, it is important to first understand about trade credit and its characteristics.What is Trade Credit?Trade credit is an important feature of a business policy of a firm. Companies need to sell their products or services the value of which will be paid in the future to make their offers to sellers more competitive. Trade credit is also a way manufacturers adopt to make the product offer more attractive to the point of sale sellers.Trade credit creates trade debtors or ...
Read MoreWhat are the 3 Working Capital Financing Policies?
A business firm may choose to go with long-term, short-term, or a mix of the two to finance its operations.Depending on the mix of short- and long-term approaches, three types of working capital policies may be found which are as follows −Matching ApproachWhen the expected life of assets is matched with the expected life of the source of funds, the approach is known as the matching approach. In this approach, short-term financing is used for short-term assets while long-term financing is used for long-term assets.The justification for such an approach is that since financing is meant for paying the assets, ...
Read MoreTrade-off between Long-term and Short-term Financing
Businesses often need to decide whether they will go for short or long-term financing for running their businesses. The main aim of an organization is to offer maximum wealth to shareholders which is possible when a firm generates enough profits. However, the organizations must also keep an eye on the interest rates because the rates may sometimes be palpable to eat a significant chunk of earnings.It has been generally observed that short-term financing is preferable to long-term funding. Short-term financing has the benefits of cost and flexibility that make it more attractive than long-term financing.Following points will help you understand ...
Read MoreWhat is meant by Fixed Investment Ratio Method?
Fixed Investment Ratio MethodEvery business needs to maintain an optimum level of working capital to run the business smoothly. While excessive working capital harms the business inadequate amount of working capital is also a matter of concern. Therefore, businesses must estimate the working capital needs for the shorter and longer-term efficiently.The fixed investment ratio method for the calculation of working capital is a popular method. The fixed investment ratio method is one such method that can be adopted to determine the working capital needs of a company.Working Capital Calculation as A Percentage of Fixed AssetsThe calculation of working capital a ...
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