You are on page 1of 19

Vi si t

ACCA Paper F9

Financial Management
For exams in 2012

fo .th rf e re ex e p fu gr ll ou se p t .co m

w w w

Notes

theexpgroup.com

ExPress Notes

ACCA F9 Financial Management

Contents
About ExPress Notes
1. 2. 3. 4. 5. 6. 7. Financial Management Function

Financial Management Environment Working Capital Management Investment Appraisal Business Finance Cost of Capital

Business Valuations

Vi si t

Page | 2

2012 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of these notes will be accepted by the ExP Group. .

fo .th rf e re ex e p fu gr ll ou se p t .co m
3
7 11 13 21 39 45 53

theexpgroup.com

ExPress Notes

ACCA F9 Financial Management

START About ExPress Notes


We are very pleased that you have downloaded a copy of our ExPress notes for this paper. We expect that you are keen to get on with the job in hand, so we will keep the introduction brief. First, we would like to draw your attention to the terms and conditions of usage. Its a condition of printing these notes that you agree to the terms and conditions of usage. These are available to view at www.theexpgroup.com. Essentially, we want to help people get through their exams. If you are a student for the ACCA exams and you are using these notes for yourself only, you will have no problems complying with our fair use policy. You will however need to get our written permission in advance if you want to use these notes as part of a training programme that you are delivering. WARNING! These notes are not designed to cover everything in the syllabus!

They are designed to help you assimilate and understand the most important areas for the exam as quickly as possible. If you study from these notes only, you will not have covered everything that is in the ACCA syllabus and study guide for this paper. Components of an effective study system

On ExP classroom courses, we provide people with the following learning materials:

Vi si t

The ExPress notes for that paper The ExP recommended course notes / essential text or the ExPedite classroom course notes where we have published our own course notes for that paper The ExP recommended exam kit for that paper. In addition, we will recommend a study text / complete text from one of the ACCA official publishers, but we do not necessarily give this as part of a classroom course, as we think that it can sometimes slow people down and reduce the time that they are able to spend practising past questions.

ExP classroom course students will also have access to various online support materials, including: The unique ExP & Me e-portal, which amongst other things allows view again of the classroom course that was actually attended. ExPand, our online learning tool and questions and answers database

Page | 3

2012 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of these notes will be accepted by the ExP Group. .

fo .th rf e re ex e p fu gr ll ou se p t .co m

theexpgroup.com

ExPress Notes

ACCA F9 Financial Management

Everybody in the World has free access to ACCAs own database of past exam questions, answers, syllabus, study guide and examiners commentaries on past sittings. This can be an invaluable resource. You can find links to the most useful pages of the ACCA database that are relevant to your study on ExPand at www.theexpgroup.com.

HowtogetthemostfromtheseExPressnotes

For people on a classroom course, this is how we recommend that you use the suite of learning materials that we provide. This depends where you are in terms of your exam preparation for each paper.
Your stage in study for each paper Prior to study, e.g. deciding which optional papers to take These ExPress notes ExP recommended course notes, or ExPedite notes Dont use yet ExP recommended exam kit Dont use yet

At the start of the learning phase

Vi si t

Page | 4

2012 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of these notes will be accepted by the ExP Group. .

fo .th rf e re ex e p fu gr ll ou se p t .co m
ACCA online past exams Skim through the ExPress notes to get a feel for whats in the syllabus, the size of the paper and how much it appeals to you. Have a quick look at the two most recent real ACCA exam papers to get a feel for examiners style. Dont use at this stage. Work through each chapter of the ExPress notes in detail before you then work through your course notes. Dont try to feel that you have to understand everything just get an idea for what you are about to study. Work through in detail. Review each chapter after class at least once. Dont make any annotations on the ExPress notes at this stage. Make sure that you understand each area reasonably well, but also make sure that you can recall key definitions, concepts, approaches to exam questions, mnemonics, etc. Nobody passes an exam by what they have studied we pass exams by being efficient in being able to prove what we know. In other words, you need to have effectively input the knowledge and be effective in the output of what you know. Exam practice is key to this. Try to do at least one past exam question on the learning phase for each major chapter.

theexpgroup.com

ExPress Notes

Your stage in study for each paper Practice phase These ExPress notes ExP recommended course notes, or ExPedite notes Avoid reading through your notes again. Try to focus on doing past exam questions first and then go back to your course notes/ ExPress notes if theres something in an answer that you dont understand. ExP recommended exam kit This is your most important tool at this stage. You should aim to have worked through and understood at least two or three questions on each major area of the syllabus. You pass real exams by passing mock exams. Dont be tempted to fall into passive revision at this stage (e.g. reading notes or listening to CDs). Passive revision tends to be a waste of time. Dont touch it! ACCA online past exams ACCA F9 Financial Management

Vi si t

At the door of the exam room before you go in.

The night before the real exam

Page | 5

2012 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of these notes will be accepted by the ExP Group. .

fo .th rf e re ex e p fu gr ll ou se p t .co m
Work through the ExPress notes again, this time annotating to explain bits that you think are easy and be brave enough to cross out the bits that you are confident youll remember without reviewing them. Read through the technical articles written by the examiner. Read through the two most recent examiners reports in detail. Read through some other older ones. Try to see if there are any recurring criticisms he or she makes. You must avoid these! Do a final review of the two most recent examiners reports for the paper you will be taking tomorrow. Read through the ExPress notes in full. Highlight the bits that you think are important but you think you are most likely to forget. Unless there are specific bits that you feel you must revise, avoid looking at your course notes. Give up on any areas that you still dont understand. Its too late now. Read quickly through the full set of ExPress notes, focusing on areas youve highlighted, key workings, approaches to exam questions, etc. Avoid looking at them in detail, especially if the notes are very big. It will scare you. Leave at home. Leave at home.

Download the two most recent real exam questions and answers.

theexpgroup.com

ExPress Notes
Our ExPress notes fit into our portfolio of materials as follows:
ACCA F9 Financial Management

Notes

Provide a base understanding of the most important areas of the syllabus only.

To maximise your chances of success in the exam we recommend you visit www.theexpgroup.com where you will be able to access additional free resources to help you in your studies.

START About The ExP Group

Vi si t

Born with a desire to be the leading supplier of business training services, the ExP Group delivers courses through either one of its permanent centres or onsite at a variety of locations around the world. Our clients range from multinational household corporate names, through local companies to individuals furthering themselves through studying for one of the various professional exams or professional development courses.

As well as courses for ACCA and other professional qualifications, our portfolio of

expertise covers all areas of financial training ranging from introductory financial awareness courses for non-financial staff to high level corporate finance and banking courses for senior executives. Our expert team has worked with many different audiences around the world ranging from graduate recruits through to senior board level positions. Full details about us can be found at www.theexpgroup.com and for any specific enquiries please contact us at info@theexpgroup.com.

Page | 6

2012 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of these notes will be accepted by the ExP Group. .

fo .th rf e re ex e p fu gr ll ou se p t .co m
Notes Notes
Provide a comprehensive coverage of the syllabus and accompany our face to face professional exam courses Provide detailed coverage of particular technical areas and are used on our Professional Development and Executive Programmes.

theexpgroup.com

ExPress Notes
Chapter 1
ACCA F9 Financial Management

Financial Management Function

KEYKNOWLEDGE TheNatureandPurposeofFinancialManagement

Vi si t

Management accounting is a set of tools and disciplines measuring corporate performance and to facilitate decision-making; it is designed and implemented in coordination with the companys strategy.

Financial accounting is concerned with maintaining the records of the transactions of the firm and preparing financial statements for the benefit of shareholders (and other external audiences) in conformity with established accounting standards.

The main purpose of financial strategy is to ensure that financial resources are available to the organization in support of its overall corporate objectives, which include financial objectives.

Page | 7

2012 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of these notes will be accepted by the ExP Group. .

fo .th rf e re ex e p fu gr ll ou se p t .co m

theexpgroup.com

ExPress Notes

ACCA F9 Financial Management

In pursuing its financial objectives, the firm must ensure that those objectives are congruent i.e. consistent with its overall corporate strategy.

KEYKNOWLEDGE StakeholdersandImpactonCorporateObjectives

Stakeholder groups

Shareholders: As owners of the business, they rank supreme, as reflected in US/UK models of corporate governance;

Lenders: Important if the business relies heavily on providers of loan capital (banks, bondholders);

Directors: The executive directors or senior management of the business are central since they have hands-on power and can serve their own interests (giving rise to agency risk);

Vi si t

Customers: No customers, no business! How influential they are or how carefully management needs to listen to their concerns depends on the type of business activity and the competitive environment; Suppliers: Good and reliable suppliers can be critical to corporate success;

Government: They have two major interests: (a) they receive revenue via taxes and (b) benefit indirectly when firms create employment. Environmental and other regulatory concerns are also within the scope of the governments interest;

Public: The general public, its opinions and ability to exert pressure through lobby groups are all relevant factor for businesses that pollute, are involved in nuclear power, or carry out other activities that may be controversial (e.g. abortion clinics).

Employees: Often referred to as a companys most valuable asset; they must be motivated and adequately compensated;

Page | 8

2012 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of these notes will be accepted by the ExP Group. .

fo .th rf e re ex e p fu gr ll ou se p t .co m

KEYKNOWLEDGE FinancialObjectivesandtheRelationshipwithCorporate Strategy

theexpgroup.com

ExPress Notes
Conflicting stakeholder interests Conflicting interests can exist between various stakeholder groups.
ACCA F9 Financial Management

Agency theory

Agency theory addresses the risk that management will not act in the best interest of the shareholders, but will make decisions that will serve its own interests.

Examples of self-serving management behavior could include: (a) artificially boosting corporate profits in the short-term in order to earn bonuses; (b) paying too much to acquire another company for reasons of prestige or in order to build empires; (c) rejecting opportunities, such as takeover bids, or restructuring initiatives, that might jeopardize their positions (an orientation to maintaining the status quo). Influencing managerial behavior

In order to cause managers to behave in a way consistent with stakeholder interests, rewards and bonus schemes need to be carefully designed. This can be seen as the internal dimension to corporate governance. The other dimension -- external comes in the form of regulation.

Vi si t

Shareholder value measurements focus on creation of shareholder value as fundamental aim of profit oriented companies. Long-term wealth maximization is not always consistent with the artificial inflation of profits in the short-term. If a company stops investing, for example, it can boost its shortterm profitability, but this may come at the expense of the companys medium- to long-term competitiveness.

The following are some of the financial measures typically used by companies to measure performance. Return on Investment (ROI/ROCE) (Accounting PBIT / Accounting Capital Employed) * 100%

Scope of strategic performance measures in private sector

Page | 9

2012 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of these notes will be accepted by the ExP Group. .

fo .th rf e re ex e p fu gr ll ou se p t .co m

Management must examine the degrees of stakeholder influence and actively manage the relationship with relevant stakeholders.

theexpgroup.com

ExPress Notes
Accounting Capital Employed = Total Assets Current Liabilities = Total Non-Current Assets, net + Working Capital
ACCA F9 Financial Management

Consequently, gross value of fixed assets may be used in measuring performance based on ROI. Earnings Per Share (EPS)

Net income less any preferred dividends divided by the number of shares outstanding. Return on Equity

Net income divided by shareholders equity.

Profit and Not-for-profit organisations

Profit-seeking organizations exist ultimately to create wealth for their owners.

Vi si t

Non-profit (or not-for-profit) organizations are created to accomplish a pre-defined mission, such as the delivery of a service; they are expected to do so in an economical manner.

KEYKNOWLEDGE FinancialandOtherObjectivesinNonforProfit Organisations

Page | 10

2012 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of these notes will be accepted by the ExP Group. .

fo .th rf e re ex e p fu gr ll ou se p t .co m

Disadvantage: ROI/ROCE increases as investment centres fixed assets grow older, thus a ROI improvement over time (or a better ROI compared to another division) may be partly attributable to the age of the assets used.

theexpgroup.com

ExPress Notes
Chapter 2
ACCA F9 Financial Management

Financial Management Environment

The economic environment for business

The impact of macro-economics Businesses must also take macro-economic factors into account:

Vi si t

Projected level of market demand for goods and services in the economy;

In a recovery phase, how government policies are likely to be adjusted with respect to: (a) Monetary policy: Effect on interest rates, exchange rates and inflation, (the latter may eventually increase with economic recovery); (b) Labor policy: If labor markets tighten, how fast will restrictions (imposed on foreign labor, for example) be relaxed? (c) Fiscal policy: Tax increases (both personal and corporate);

The general economic environment, and in particular the influence of governments through its monetary and fiscal policies has a far-reaching impact on most businesses.

Page | 11

2012 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of these notes will be accepted by the ExP Group. .

fo .th rf e re ex e p fu gr ll ou se p t .co m

theexpgroup.com

ExPress Notes
(d) Trade policy: to what degree is any protectionism likely to stay in place? Again, actively keeping up with reading on these issues will be the best way to prepare for this section of the exam. The nature and role of financial markets and institutions
ACCA F9 Financial Management

Financial markets and institutions have achieved such a degree of global integration that shocks in one part as shown with the onset of the financial crisis in 2008 can have systematic implications across all markets. Stock markets

A stock exchange is an organized and regulated market place which permits: (i)

Companies to raise capital through the issuance of new shares or debentures (collectively known as securities); the proceeds of such issuances go to the company issuing them -- this is called the primary market; and Investors to buy and sell already-issued securities called the secondary market.

(ii)

Traditionally, the operation of a stock market is accomplished through an auction system where prices are publicly posted after trades are executed; specialists on the trading floor have the role of creating a market in shares that are listed on the exchange: they are expected to provide two-way prices, i.e. to quote buy and sell prices, thus ensuring liquidity to the market. The New York Stock Exchange operates in this way. Outside the US, electronic trading systems have become more typical, in which traders interact not personally but by computer and telephone.

Vi si t

How stock markets operate

Page | 12

2012 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of these notes will be accepted by the ExP Group. .

fo .th rf e re ex e p fu gr ll ou se p t .co m

theexpgroup.com

ExPress Notes
Chapter 3
ACCA F9 Financial Management

Working Capital Management

START The Big Picture

1. The nature, elements and importance of working capital

This is a core function of management which has day-to-day implications. Working capital definition: Current assets Current liabilities

Vi si t

This is an accounting definition. The discussion and analysis of working capital management focuses on the operating elements of current assets and liabilities: Cash Inventory Receivables Payables

2. Management of inventories, accounts receivables, accounts payable and cash These elements are linked through the Cash conversion cycle, also known as the Cash Operating Cycle.

Page | 13

2012 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of these notes will be accepted by the ExP Group. .

fo .th rf e re ex e p fu gr ll ou se p t .co m

theexpgroup.com

ExPress Notes
Raw materials received Receipt of cash
ACCA F9 Financial Management

Sale of goods

The above diagram shows the operating cash flows for a typical manufacturing company converting raw materials into finished goods for sale. The company needs its own cash to pay the supplier and can only recover this from the sale of the finished goods. The cash invested in inventories and receivables represents a cost to the company. This is most directly obvious in opportunity cost terms: the cash could be earning interest, reducing interest-bearing debt, or ultimately find its way into shareholders pockets as a dividend payment. The presence of payables indicates that cash payments (outflows) are delayed; this is beneficial to the company as long as it is not overdue on its payments, as late payment could lead to penalties or damage to the companys reputation (creditworthiness). Managing the individual parts of working capital means managing the whole picture in an optimal way; doing this well can give a firm a significant competitive advantage over its competitors.

Ratio Analysis

Vi si t

Liquidity ratios

The relationship between current assets and current liabilities is used as a measure of liquidity in the firm: Current ratio = Current assets Current liabilities Quick ratio = Current assets - Inventories Current liabilities

Page | 14

2012 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of these notes will be accepted by the ExP Group. .

fo .th rf e re ex e p fu gr ll ou se p t .co m
Payment to supplier Conversion into finished goods

theexpgroup.com

ExPress Notes

ACCA F9 Financial Management

Turnover ratios
(1) Trade debtors (receivables)

(2) Inventory turnover

Inventory x 365 COGS

(3) Trade creditors (payables)

Trade Payables x 365 COGS Economic Order Quantity (EOQ)

Within a company, there is a natural temptation to accumulate buffer stocks (raw materials and semi-finished goods) so that production is never interrupted. Similarly, in order to avoid stock-outs, sales managers will insist on maintaining a plentiful level of finished goods. All of this costs money.

Vi si t

To determine the total costs, the following data is required: Q = order quantity

D = quantity of product demanded annually P = purchase cost for one unit

C = fixed cost per order (not incl. the purchase price) H = cost of holding one unit for one year

The EOQ is a method which seeks to minimize the costs associated with holding inventory.

Page | 15

2012 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of these notes will be accepted by the ExP Group. .

fo .th rf e re ex e p fu gr ll ou se p t .co m

Trade Debtors x 365 Sales

theexpgroup.com

ExPress Notes
The total cost function is as follows: Total cost = Purchase cost + Ordering cost + Holding cost which can be expressed algebraically as follows: TC
ACCA F9 Financial Management

It is this total cost function which must be minimized. Recognizing that:

PD does not vary; Ordering costs rise the more frequently one places (during the year); and Holding costs rise the fewer times one places orders (due to larger quantities being ordered each time),

It follows that there is a trade-off between the Ordering and the Holding costs.

The optimal order quantity (Q*) is found where the Ordering and Holding costs equal each other, i.e. C x D/Q = H x Q/2

Rearranging the above and solving for Q results in

Vi si t

EXAMPLE

A trucking company uses disposable carburetor units with the following details: Weekly demand Purchase price Ordering cost Holding cost 500 units USD 15 / unit USD 40 / order 7% of the purchase price

Assume a 50 week year. What is the optimal order quantity?

Page | 16

2012 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of these notes will be accepted by the ExP Group. .

fo .th rf e re ex e p fu gr ll ou se p t .co m
= PxD + C x D/Q + H x Q/2

theexpgroup.com

ExPress Notes
Assessing the creditworthiness of customers When assessing the creditworthiness of (potential) clients, companies can use the approach typically employed by banks, referred to (originally) as the 3 Cs of credit, later expanded to the 5 Cs. They are (1) Character: Focuses on the reputation of the principals/decision makers at a company; credit checking agencies and bank references assist to this end;
ACCA F9 Financial Management

(2) Capacity: Examines the companys cash flow generation in the context of managements ability to perform competently and reliably in meeting their obligations, based on an examination of their track record (either directly or via the experiences of others). Financial statement analysis is a major part of the exercise here (and in the next point);

(3) Capital: Identifies and assesses the financial staying power and resources of the business; how much of a capital cushion do they have to withstand losses and how much do they have committed at risk in a proposed transaction that incentivizes them to succeed (one can refer to this as the pain factor);

(4) Collateral: Assesses what (if any) security the company is willing to provide in support of the intended transaction. Banks refer to this as providing additional exits (ways out) from a transaction. (5) Conditions: This is a general review of the economic environment to appreciate to what extent a customer may be affected by a decline in general business conditions (business cycle influences).

Vi si t

EXAMPLE

A downturn in housing construction will affect a range of other businesses, from plumbers to building material producers and companies leasing earth-moving equipment. Anyone selling to such businesses needs to keep the big picture in mind so as not to be over-exposed to secondary influences.

Settlement discounts The objective of granting a settlement discount is to give customers a financial incentive to pay their bills more quickly (before the standard due date).

Page | 17

2012 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of these notes will be accepted by the ExP Group. .

fo .th rf e re ex e p fu gr ll ou se p t .co m

theexpgroup.com

ExPress Notes
A company granting settlement discounts must ensure that the benefits of doing so will outweigh the costs.
ACCA F9 Financial Management

EXAMPLE

Redwood Co. currently gives payment terms of 3 months to its customers. If it shortens this to one month by offering a 2% settlement discount, calculate what the impact will be if sales of USD 5m remain unchanged and all customers elect to take advantage of the discount. The companys cost of capital is 15%.

Cost of financing receivables for 3 months: 5,000,000 x 3/12 x 15%

Cost of financing receivables for 1 month: 5,000,000 x 1/12 x 15%

Cost of settlement discount:

Vi si t

The discount is worth implementing as the company achieves a net benefit of USD 25,000. Collection of debts

A company must have in place a clear policy on the collection of debts.

Even if a good screening/assessment procedure is in place for accepting and reviewing customers, late payments are a fact of life and must be handled pro-actively. Much time can be spent in chasing late payments and if this process is not well-organized, management may come to the conclusion that it is not worthwhile. This is especially true in cases where a company is growing very quickly and celebrates the signing of contracts and issuance of invoices as signs of success. If, however, these invoices are not collected in due time (or at all), then the company is throwing away the rewards of success.

Page | 18

2012 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of these notes will be accepted by the ExP Group. .

fo .th rf e re ex e p fu gr ll ou se p t .co m
= 187,500 = 62,500 Savings in financing costs = 125,000 5,000,000 x 2% = 100,000

theexpgroup.com

ExPress Notes
Deductions Another phenomenon which results in significant write-offs of receivable is the practice of deductions in which a customer pays less than the full amount of the invoice, giving a reason for withholding the difference. This amounts to a renegotiation of the original invoice and is often accepted as a fait accompli by the supplier. A company managing its receivables diligently will have the following:
ACCA F9 Financial Management

(1) A monitoring system that clearly flags late payers, known as an aging system. This includes identifying properly the practice of deductions mentioned above;

(2) A follow-up system that assigns responsibility to specific staff doing the follow-up; this includes an elevating of difficult cases to more senior and/or more experienced staff to handle; (3) Training for staff involved in handing follow-ups, whether performed by phone, mail or personal visits;

(4) A policy determining when to involve refer the case to lawyers (preferably in-house, for cost reasons) in preparation of follow-up letters. An external lawyer may carry more weight, but is also more costly;

Vi si t

Evaluating a change in a credit policy requires the identification of relevant cash flows structured as before (the change) and after scenarios.

A company has current annual sales of USD 3,000,000 of which 50% is cash and 50% on 2 month credit terms. The contribution on credit sales is 25% of the selling price. The company is considering reducing its credit terms to 1 month and expects all (credit) customers to accept it with a 2% discount. No change in sales volume is anticipated. The company uses a 15% cost of capital.

Financial implications of different credit policies

(5) Use of a collection agent to chase the receivable. Here again, a company must calculate the costs and benefits of involving an external agent. In such an analysis, the savings of management time (opportunity cost) is the most difficult to estimate.

EXAMPLE

Page | 19

2012 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of these notes will be accepted by the ExP Group. .

fo .th rf e re ex e p fu gr ll ou se p t .co m

theexpgroup.com

You might also like