Management of Receivables^231
Discount Period: The analysis of changing discount periods is very similar to the analysis
for changing credit discounts. As the discount period is increased, the opportunity cost
of not taking a discount increases. Therefore, it becomes more attractive for a credit
buyer to take the discount. However, as the discount period is extended the existing
discount takers take advantage of the liberalised credit terms and delay making
their payments until the end of the new discount period. Whether extending the
discount period is desirable is dependent on whether total receivables increase or
decrease.
Continuing the Mitsui example, the firm can change credit terms to 2/12, net 30 or
2/15, net 30 under plans E and F, respectively. The per cent of sales subject to
the discount would be 60 per cent in plan E and 80 per cent in plan F. Should
Mitsui switch to either plan E or plan F? Gross sales would not be affected by these
alternative plans.
Table 3: Analysis of Credit Terms Changing Discount periods for Mitsui CorporationSales subject to discounts would be Rs 18 crore, Rs 21.6 crore, and Rs 28.8 crore, for
the present terms, plan E, and plan F, respectively. Credit discount at 2 per cent would
be Rs 360,000 for the present plan and Rs 432,000 and Rs 576,000 for plans E and F,
respectively. The increase in discounts for plan E would be Rs 72,000 and would be Rs
216,000 for plan F (Table 3).
The total receivables under plan E would be [0.6 (10 days) + 0.4 (30 days)] ◊ Rs
100,000 = 1.8 crore. The same entry would be [0.8 (10 days) + 0.2 (30 days)] ◊ Rs
100,000 Rs 1.4 crore for plan F. A decrease in investment costs due to a decrease in
receivables is Rs 24,000 for plan E and Rs 72,000 for plan F. Taking into consideration
the increased discounts being given, we find that neither of the two new plans is
acceptable.
Simultaneous Changes in Credit Terms
Most firms, from a practical standpoint, will consider changes in all credit terms
Present Plan E Plan F
(d) Gross sales volume Rs 36,000,000 Rs 36,000,000 Rs 36,000,000
(e) Sales with discounts (%) 50% 60% 80%
(f) Sales with discounts (1×2) Rs 18,000,000 Rs 21,600,000 Rs 28,800,000
(g) Credit discounts (Rs = 3×2%) Rs 360,000 Rs 432,000 Rs 576,000
(h) Increase in discounts 0 Rs 72,000 Rs 216,000
(i) Total receivables Rs 2,000,000 Rs 1,800,000 Rs 1,400,000
(j) Decrease in receivables 0 Rs 200,000 Rs 600,000
(k) Decrease in investment costs (7×12%) 0 Rs 24,000 Rs 72,000
(l) Increase in profits (8–5) 0 (Rs 48,000) (Rs 144,000)