Accounts receivable level. How to control accounts receivable: methods and tools
For financial management purposes, accounts receivable usually means only the debt owed by customers to the organization.
Accounts receivable is a very variable and dynamic element of working capital, significantly depending on the policy adopted by the organization in relation to product buyers (credit policy).
Since accounts receivable represents the immobilization of its own working capital, then, in principle, it is unprofitable for the enterprise - the conclusion obviously suggests itself about its maximum possible reduction. Theoretically, accounts receivable can be reduced to a minimum, but this does not happen, primarily due to the customary commercial practice of providing trade credit to buyers.
Accounts receivable can be acceptable, that is, due to the current form of payment, and unacceptable, indicating shortcomings in the management of the financial and economic activities of the enterprise and violation of payment discipline. (Stoyanova E.S., Bykova E.V., Blank I.A., 1998)
From the standpoint of reimbursement of the cost of delivered products, the sale can be carried out using one of three methods: 1) prepayment; 2) payment in cash; 3) payment with deferred payment, carried out in the form of non-cash payments, the main forms of which are payment order, payment request, letter of credit, collection payments and settlement check. The last scheme is the most disadvantageous for the seller, since he has to credit the buyer, but it is the main one in the payment system for delivered products. When paying with deferred payment, receivables for commodity transactions arise as a natural element of the generally accepted payment system.
Accounts receivable management involves:
Determination of models and principles of credit policy;
Control over the turnover of funds in settlements;
Analysis and control of the level of accounts receivable;
Analysis and control of the structure of accounts receivable;
Assessment of accounts receivable from the point of view of payment discipline.
When developing a policy for lending to buyers of its products, an enterprise must decide on key issues:
1. loan period;
2. creditworthiness standards;
3. system for creating reserves for doubtful debts;
4. payment collection and debt collection system;
5. system of discounts provided.
Most often, an organization has several standard contracts that provide for a deadline for payment for products.
Credit standards refer to the criteria by which the supplier determines the financial solvency of the buyer and the resulting possible payment options. It is assumed that, no matter how well the system for working with debtors is, there is always a risk of non-receipt of payment, at least due to force majeure circumstances. Based on the principle of caution and prudence, when implementing financial policies, it is necessary to create in advance a reserve for losses due to the insolvency of the buyer.
The section on the payment collection and debt collection system defines procedures for interaction with buyers in case of violation of terms or conditions of payment, a set of criterion values of indicators indicating the significance of payment violations, a system for punishing unscrupulous counterparties and other methods of preventing and overcoming the consequences of non-fulfillment of obligations by buyers.
Business customs in a market economy provide for the provision of discounts in the event of an agreed and fairly short period of payment for the products provided.
Thus, an effective system for establishing relationships with customers implies: 1) high-quality selection of customers to whom credit can be provided; 2) determining optimal lending conditions; 3) development of a clear procedure for filing claims; 4) monitoring how clients fulfill the terms of contracts.
The type of credit policy is determined by the ratio of the level of profitability and risk that the enterprise takes when choosing one or another type of credit policy. It can be: conservative, moderate, aggressive. (N.V. Romanova, 2000)
Conservative policy is aimed at minimizing credit risk. This is achieved by: reducing the number of buyers on credit due to high-risk groups, minimizing the terms and size of the loan provided, tightening the terms of the loan and increasing its cost, and using strict procedures for collection of receivables.
Moderate policy is characterized by an average level of credit risk.
An aggressive policy is characterized by the enterprise’s desire to maximize the volume of product sales, including through sales on credit, regardless of the high level of risk: maximum distribution of credit to all groups of buyers, including risky ones, increasing the period of credit provision and its size, reducing the cost of the loan to the minimum acceptable amount, providing buyers with the opportunity to extend the loan.
The problem of choosing a credit policy is solved by each enterprise based on the targets, plans and preferences of management and financial managers.
Depending on the period for reimbursement of the cost of the supplied products, the sale can be carried out in one of three ways:
- 1) prepayment (the goods are paid in full or in part before they are transferred by the seller) – the seller incurs an account payable to the buyer;
- 2) payment in cash (the goods are paid in full at the time of transfer of the goods, i.e. it is as if the goods are exchanged for money) - the proceeds immediately take the form of cash in this case, the buyer does not owe any debt to the seller;
- 3) payment on credit (the goods are paid for a certain time after it is transferred to the buyer) - on the part of the seller, the buyer owes a receivable to him.
In conditions of increasing competition, non-price competitive factors, as we know, come to the fore in competition. These factors include the provision of preferential terms of payment to the buyer - a deferment, as a result of which the seller’s proceeds take the form of an obligation of the buyer to the seller - accounts receivable.
The conditions under which the seller provides a deferred payment to the buyer (commercial loan) are determined by the following main factors:
- 1) deferment period – when determining the maximum permissible period, it should be taken into account that with an increase in the deferment period, the level of financial risk increases;
- 2) buyer's creditworthiness level – the seller must analyze the buyer’s financial condition, assessing, in particular, his ability to pay for this obligation; the level of creditworthiness determines, firstly, the very possibility of granting a deferred payment, and secondly, the maximum permissible amount of debt;
- 3) level of reserves for doubtful debts – such reserves act as a source to cover losses from unpaid receivables; the maximum permissible amount of the reserve is determined by the financial potential of the seller, and from the maximum permissible value the threshold limit of the buyer's solvency risk is determined (in other words: the more amount the company can afford to lose, the lower the acceptable level of solvency will be for buyers to whom it agrees to provide a deferment);
- 4) payment collection systems – the influence of this factor is in many ways similar to the previous one: the more powerful the collection system the seller can afford, the wider the circle of buyers who are granted a deferment; conversely, if the financial potential of the seller does not allow him to have a special payment collection service, it is advisable to provide a deferment only to buyers with a “good credit history.” The payment collection system usually includes: procedures for interaction with debtors in case of violation of payment terms; development of criteria and monitoring of payment discipline indicators; methods of punishing unscrupulous counterparties.
There are two forms of commercial credit:
- 1) trade credit - a deferred payment for products is provided to a business entity;
- 2) consumer loan – deferred payment is provided to individuals when they purchase goods, works, and services.
The main difference between forms of commercial credit is the level of risk.
The main goal of the accounts receivable management system (as well as other company asset management systems) is to increase the efficiency of using working capital; Its tasks usually include:
- – acceleration of cash turnover in settlements;
- – sales stimulation and, as a result, acceleration of inventory turnover of finished products in the warehouse;
- – maintaining an acceptable level of financial risk (there is a rule according to which the risk of non-payment of receivables is directly proportional to the period of deferment).
The central place in the accounts receivable management system is the determination of its acceptable (or appropriate) level. At the same time, the level of receivables is understood as its share in the total amount of current assets, determined by the formula:
Since receivables represent funds temporarily diverted from circulation, the KDZ coefficient has a very specific meaning, showing the share of diversion of current assets (therefore it is sometimes called the coefficient of diversion of current assets into receivables).
One of the most important factors determining the level of receivables (and at the same time the level of efficiency of the receivables management system) is the receivables turnover. It is analyzed according to the following indicators:
- – the turnover time of receivables (average collection period), which determines the contribution of receivables to the actual duration of the financial and general operating cycle of the organization (see formula 2.28);
- – the rate of turnover of funds invested in accounts receivable (see formula 2.27).
The next factor that determines the level of receivables (or rather, the factor that determines the need for mandatory and careful management of this level) is the quality of receivables. The quality of accounts receivable is usually assessed by the following indicators:
a) receivables consolidation ratio () - shows how much funds are diverted into debit
Torque debt on an ongoing basis per 1 rub. revenue from product sales:
b) receivables overdue ratio () – shows the share of overdue debts in the total amount of receivables:
(5.7)
η) average age of overdue debt (APdz):
(5.8)
The next factor determining the level of receivables (in the sense of the feasibility of the existing level) is the economic effect of diverting current assets into receivables. This effect can be calculated in two ways:
a) in absolute form:
(5.9)
where Profits is the company’s additional profit received from increasing the volume of product sales by providing customers with deferred payment; Current costs - the company's current costs associated with organizing customer lending and debt collection; Financial lossesDZ - the amount of direct financial losses from non-repayment of debt by buyers;
b) in relative form:
The absolute effect allows us to assess the feasibility of diverting funds to accounts receivable as a whole: if the value of the indicator is negative, providing a deferment to customers is not advisable at all. At the same time, it is very difficult to assess the acceptable level of receivables based on the indicator, since it is not directly related to the amount of receivables themselves.
For the purposes of managing the level of receivables, a relative indicator of KEDZ is used, which in its meaning is very similar to profitability indicators.
Another important factor determining the level of accounts receivable is the payment forms used by the company in relation to settlements with customers. The following forms of payment exist:
- – settlements by payment orders;
- – settlements under a letter of credit;
- – payments by checks;
- – settlements for collection (payment requests or collection orders);
- – settlements by mutual offset of claims;
- - settlements with bills.
The first four forms are types of non-cash payments and their use in the Russian Federation is regulated by the Regulations on the rules for transferring funds, approved by the Bank of Russia dated June 19, 2012 No. 383-P. Settlement payments are governed by the general provisions of civil law. The circulation of bills of exchange is regulated by Federal Law No. 48-FZ dated March 11, 1997 “On promissory notes and bills of exchange.”
Non-cash payments, regardless of the form of their implementation, do not have a significant impact on the level of receivables. The difference between them lies in the calculation technique, due to which the speed of calculations for different forms changes. This fact affects the speed of receivables turnover, but with long deferments such an effect is negligible (for example, one day acceleration of settlements cannot be taken into account, provided that the seller provides the buyer with a three-month deferment).
Settlement through offsets leads to a significant reduction in the level of accounts receivable, since in this case mutual compensation of accounts payable and receivable occurs. However, this form of payment can be used only in a limited number of cases (there must be mutual obligations of the counterparties to each other).
Bill payments also have a significant impact on the level of accounts receivable due to the fact that they are taken into account by the organization as short-term financial investments (in this case we do not consider bills issued for long periods). Thus, formally, according to accounting data, the level of accounts receivable is reduced. However, unlike offsets, the reduction does not occur due to a reduction in the amount of debt owed to the company by third parties, but due to the “disguise” of this debt with another accounting item. Thus, when carrying out bill settlements, the analysis of accounts receivable must necessarily be carried out taking into account the debt on bills, otherwise the amount of real debt of buyers will be underestimated.
As stated above, the source of accounts receivable is commercial credit. Therefore, one of the most important tasks of the accounts receivable management system is to determine the maximum permissible amount of a commercial loan. This value is determined by establishing a quota for the amount of receivables (calculated in any convenient way, for example, based on the maximum permissible share of receivables in the structure of current assets or in another way). Next, the planned value of a commercial loan can be calculated according to the following scheme.
- 1. Determining the acceptable range of buyers who can be granted a deferred payment (taking into account, in particular, the level of risk), and the required volume of credit.
- 2. Determination of the required amount of financial resources invested in accounts receivable to secure a commercial loan. When calculating this amount, it is advisable to take into account:
- – planned volumes of product sales on credit;
- – average period for granting deferred payment;
- – the average period of late payments based on the results of the analysis of accounts receivable in previous periods;
- – the ratio of cost and price of products sold on credit.
Calculation of the required amount of financial resources invested in accounts receivable can be made using the following formula:
(5.11)
where ORK is the planned volume of product sales on credit.
3. Analysis of the admissibility of the estimated level of receivables obtained at the previous stage using formula 5.11. If the company’s financial capabilities do not allow investing the estimated amount in full, then it is necessary to change either the credit conditions or the planned volume of product sales on credit (or both initial factors together).
The possible amount of a commercial loan can be expanded through the use of a mechanism discounts The discount is one of the essential conditions for granting deferred payment. Its purpose:
- 1) reducing financial risk by reducing the deferment period;
- 2) acceleration of accounts receivable turnover.
The disadvantage of the discount mechanism is the reduction in profits due to a reduction in the sales price by the amount of the discount provided. Thus, the main task of managing receivables through the discount mechanism is to find a reasonable compromise between the desire to receive a given profit and the desire to collect receivables as soon as possible (in order to reduce the level of financial risk).
There are two main types of discounts:
- 1) fixed - the size of the discount and the corresponding payment term are clearly determined (for example, when paying a month ahead of schedule, the discount will be 5%; or when paying within seven days after purchase, a 10% discount is provided);
- 2) floating - the relationship between the deferment period and the discount amount is determined, so the discount changes daily in the range from zero (payment within the period established by the contract) to the maximum value (payment at the time of purchase or immediately after it); this method is more complex in calculations and is used in cases where it is economically feasible to “fight” for each day of reducing the deferment period.
The planned value of a commercial loan under the conditions of providing discounts is determined in the same way as shown earlier, but when calculating the Invd indicator, the average length of the deferment period reduction and the average level of price reduction due to the application of the discount are taken into account.
One of the important methods of managing receivables is refinancing, i.e. accelerated transfer of receivables into highly liquid forms of current assets - cash and highly liquid short-term securities (for more information on refinancing, see paragraph 8.2).
An important component of the accounts receivable management system is provisions for doubtful and bad debts, which represent an internal way of insuring the risks of non-payment of receivables. To justify the amount of the reserve, an analysis of the size and composition of problem debt is carried out, which should be divided into two categories:
- 1) doubtful debt – characterized by a high and extremely high (but not 100%) risk of non-repayment of the debt: for example, the buyer-debtor has temporary problems with solvency, and at the moment it is not clear whether he will be able to solve these problems or will be declared bankrupt;
- 2) bad debt - the risk of non-receipt tends to 100%: for example, the debtor has “disappeared” (changed his legal address and bank details, and the company has no information about where to look for him) or the debtor has no money and does not expect it - the bankruptcy process is underway .
Provisions for doubtful and bad debts usually take the form of a special fund (or a system of such funds, for example, in banking), into which periodic deductions are made from the company's profits based on the results of the inventory of receivables. The disadvantage of creating such a reserve is the reduction in profit by the amount of the corresponding deductions. However, the advantage is that losses in the form of uncollectible debt are written off at the expense of the reserve amount, without affecting the company’s profit. As a result, the company has stable (albeit lower) profits that are not subject to fluctuations due to losses from uncollected debt.
The most time-consuming aspect in the general scheme for determining the amount of the reserve is determining the share of deductions to the reserve for each category of problem debt. This problem can be solved in various ways, including the construction of mathematical models. However, if possible, the share of deductions is determined based on an analysis of data from previous periods. For example, if on average for previous years it is known that of doubtful debts overdue from 30 to 60 days, 10% was subsequently written off as a loss, then the share of deductions to the reserve for this category should be 10% of the inventory value of the debt.
In this case, the cost symbolizes expenses, i.e. outgoing cash flows of the company, and the price is income, i.e. incoming cash flows. Thus, the price-cost ratio can generally be interpreted as the ratio of incoming and outgoing cash flows. In general, when managing accounts receivable, it is important to remember that it is nothing more than a transfer of part of the incoming cash flow to the future.
34. Types of accounts receivable. Its level and the factors that determine it.
Accounts receivable include:
Debt of buyers to the organization for products supplied but not paid for,
Debt on claims or disputed debts in case of violation of contractual obligations and the occurrence of a lawsuit;
Debt of accountable persons when receiving funds on account for business trips and other purposes;
Debt of tax authorities to an enterprise in case of overpayment of taxes and payments to the budget and other types.
For financial management purposes, accounts receivable usually means only the debt owed by customers to the organization.
Accounts receivable is a very variable and dynamic element of working capital, significantly depending on the policy adopted by the organization in relation to product buyers (credit policy).
Since accounts receivable represents the immobilization of its own working capital, then, in principle, it is unprofitable for the enterprise - the conclusion obviously suggests itself about its maximum possible reduction. Theoretically, accounts receivable can be reduced to a minimum, but this does not happen, primarily due to the customary commercial practice of providing trade credit to buyers.
Accounts receivable can be acceptable, that is, due to the current form of payment, and unacceptable, indicating shortcomings in the management of the financial and economic activities of the enterprise and violation of payment discipline.
From the point of view of reimbursement of the cost of delivered products, the sale can be carried out using one of three methods:
1) prepayment;
2) payment in cash;
3) payment with deferred payment, carried out in the form of non-cash payments, the main forms of which are payment order, payment request, letter of credit, collection payments and settlement check.
The last scheme is the most disadvantageous for the seller, since he has to credit the buyer, but it is the main one in the payment system for delivered products. When paying with deferred payment, receivables for commodity transactions arise as a natural element of the generally accepted payment system.
35. Effective inventory management as a factor in profit growth.
Successful inventory management allows you to reduce the duration of the production and entire operating cycle, reduce the current costs of storing them, and release part of the financial resources from the current economic turnover, reinvesting them in other assets. The model of economically justified needs helps to calculate the optimal order level, which will give the minimum annual cost of storing inventory and the cost of order fulfillment, for a given production volume. The optimal order quantity is a reasonable compromise between the cost of storage and the cost of order fulfillment Q = where D is annual demand, Q is order volume. S – order cost It can also determine the optimal batch size of manufactured products and the optimal average stock size of finished products. The A-B-C method allows you to effectively control the movement of inventory. This method classifies inventory according to a specific indicator of importance, using three classes of items: A (very important), B (items of moderate importance), C (least important). However, the actual number of categories varies from company to company, depending on the level of detail chosen and the elaboration of inventory management activities. Using three classes, class A represents 10% to 20% of the total items by volume, and 60% to 70% by price. At the other extreme of importance, class C items can account for up to 60% of storage volume and only about 10%-15% of price. Group A reserves should be most carefully controlled and their quantities maintained at a relatively low level.
In the above example, the assumption was made that the sales of both firms are the same. But this assumption is unfounded. Company B can have much higher revenue than company A, since it is a more attractive business partner for customers due to liberal sales conditions. As a result, net profit may be higher, which will certainly affect the return on equity. At the same time, bad debts can bring additional costs to firm B and cause a reduction in net profit. As a result, return on equity may decline.
These conflicting factors make it more difficult to assess the situation. However, the decisive factor is sales, which, under more generous terms of shipment of goods, grow faster than collection costs, bad debts and opportunity costs from possible investment decisions.
To determine the best level of accounts receivable, financial managers develop the firm's credit policy.
Credit policy
Accounts receivable arise because buyers take advantage of credit conditions offered by the selling company. These terms include discounts for customers who pay bills more quickly, as well as a maximum credit period during which customers must pay their bills without a discount. For example, the terms of sale may be " 2/10 net 30", which means: customers can get a 2% discount if they pay in the first 10 days instead of the usual 30 days. Some companies provide deferred payment without offering discounts.
Clients receive a loan from the firm if they meet the requirements of a credit standard based on a number of criteria. Taken together, credit conditions and credit standards amount to credit policy.
A company that wants to change the level of accounts receivable achieves this by changing its credit policy. The weakening of credit policy through the introduction of more liberal credit standards or an increase in the credit period leads to an increase in accounts receivable. Tightening credit policy by introducing more stringent credit standards or shortening the credit period leads to a decrease in accounts receivable.
The discount percentage or duration may also change. As a result, accounts receivable will either decrease or increase, depending on how customers react to changing conditions. The impact of tightening credit policy on accounts receivable is shown in Table 4.2.
Table 4.2
The results of the company's restrained credit policy
|
Actions of the company |
Impact on accounts receivable |
|
Tightening standards for obtaining a loan |
Fewer clients receive deferred payment; accounts receivable are reduced. |
|
Reducing the loan term |
Bills are paid faster; accounts receivable decreases |
|
Reducing the discount percentage |
The number of clients is decreasing; Some customers who enjoyed significant discounts will stop using them. The resulting impact on accounts receivable depends on which is greater: the loss of sales due to the company losing some customers or the additional amount coming from customers who took advantage of a lower level of discounts that was less beneficial to them |
|
Reducing the discount period |
Similar to the previous one: some customers will be lost to the company, and some will take advantage of the discount, but will pay earlier. The resulting impact on accounts receivable is uncertain |
In order to find the optimal level of accounts receivable, it is necessary to solve a number of problems:
develop forecast financial documents for each credit policy option;
based on these documents, estimate the incremental cash flows for each option and compare them with the indicators of the current policy pursued by the company;
To better understand the process of choosing a credit policy, let's look at an example.
Let us assume that the company "Flagman" sells its products on the terms " 2/10 net 30". The Deputy Marketing Director believes that these conditions should be replaced with " 2/10 net 40". He believes that as a result of this replacement, sales will increase by 10% and bad debts will increase slightly. Should the firm change its credit policy?
To simplify the calculations, we introduce additional assumptions:
1. The deputy director is right about the 10 percent increase in sales under the new credit policy.
2. Cost of goods sold and other operating expenses reflected in the income statement, as well as all current balance sheet assets, will change in direct proportion to the change in sales, i.e. will increase by 10%.
3. The company makes all sales on credit.
Analysis of information from previous years showed:
45% of customers took advantage of discounts by paying bills within the first 10 days;
53% of customers refused discounts, paying bills after an average of 30 days;
the remaining 2% of customers paid their bills in an average of 100 days. In reality, most of these customers will never pay their bills, thereby creating bad debts.
The Deputy Director suggests that with the introduction of new conditions in the company’s credit policy, the situation may change as follows:
45% of customers will still enjoy the discount and pay their bills within the first 10 days;
52% of clients will take advantage of a 40-day payment deferment;
3% of customers will pay their bills in 100 days.
Let's calculate the average collection period for two credit policy options:
existing option:
T inc = (0.45 x 10 days) + (0.53 x 30 days) + (0.02 x 100 days) = 22.4 days;
proposed option:
T inc = (0.45 x 10 days) + (0.52 x 40 days) + (0.03 x 100 days) = 28.3 days.
Analyzing the information provided, we find out that with the current credit policy, expenses for bad debts amount to 2% of sales; in the new credit policy they will increase to 3% of sales.
The company's financial director provides the following information:
the increase in current assets caused by increased sales with the introduction of a new credit policy can be achieved by attracting a short-term loan at 6%;
the company pays income tax at a rate of 40%;
the firm's weighted average cost of capital is 10%;
The interest rate on long-term debt sources is 8%.
We will assess the feasibility of changing the credit policy in stages.
First stage. Development of forecast financial documents, including balance sheet and profit and loss account.
Tables 4.3 and 4.4 show forecast documents for two options for the credit policy of the Flagman company.
Table 4.3
Balance sheet at the end of the forecast year, thousand rubles.
|
Balance sheet items |
Existing option |
Suggested option |
Notes |
|
Fixed assets Current assets: accounts receivable |
Without changes See note 1 |
||
|
Equity: share capital Extra capital retained earnings Liabilities: long-term short-term Need for additional funding |
Without changes Without changes Growth 1500 thousand rubles. Without changes See notes 2, 3 |
||
Notes:
Accounts receivable = · T inc.
for the existing option: =12,380 thousand rubles;
for the proposed option: =17,205 thousand rubles.
RUB 9,352 thousand - this is the need for additional sources of financing, it is calculated as the difference between the value of assets (205,630) and the amount of equity and liabilities (196,278). Additional financing is needed to provide the asset growth required to support the new credit policy.
If 9,352 thousand rubles. planned to attract from outside, the company will pay interest in the form of financing costs, which must be reflected in the income statement. They will reduce net and retained earnings, which in turn will require changes in the balance sheet, and therefore changes in the need for additional financing. If the problem is solved using spreadsheets, the financial documents may be changed several times until the additional interest costs become negligible.
Table 4.4
Forecast profit and loss report for the year, thousand rubles.
Second phase. Calculation of cash growth.
At this stage, it is necessary to determine the additional cash flows that are expected as a result of changes in credit policy. Calculations are given in Table 4.5.
Table 4.5
Increase in cash flow caused by changes in the company's credit policy, thousand rubles.
So, calculations show that the company’s initial investments are equal to 9,352 thousand rubles. (additional financing to the proposed credit policy), and the net additional cash flow for the year will be 1,498 thousand rubles.
Third stage. Calculation NPV proposed change in the terms of credit policy.
NPV should be defined as the sum of discounted cash flows minus the initial investment. In this example, the initial investment in the new credit policy is additional financial resources in the amount of 9,352 thousand rubles, which the company needs, and the annual net additional cash flow is
RUB 1,498 thousand This flow by condition does not have any limited duration, i.e. the company can count on it throughout its entire life cycle. Under such conditions, it is clear that we are dealing with a perpetual annuity. To calculate the present value of a perpetual annuity PVP use the formula
PVP = PMT · ,
Where PMT- annual net cash flow; k- required rate of return equal to the weighted average cost of capital.
Substituting values into the formula, we find the current value of an endless annual flow of income of 1,498 thousand rubles, discounted at a rate of 10%:
PVP= 1,498 · = 14,980 thousand rubles.
To complete the calculation NPV, it is necessary to subtract the initial investment from the found amount, i.e. investments in changing credit policy:
NPV = PVP - P 0 = 14,980 - 9,352 = 5,626 thousand rubles.
Thus, the net present value as a criterion for assessing changes in the company’s credit policy is equal to 5,626 thousand rubles.
Since this value is positive, the proposal to change credit conditions is considered appropriate.
As a result of these changes, the value of the company will increase annually by 5,626 thousand rubles. Another evaluation method can be used - calculation of internal rate of return.
In this example, you just need to find IRR, i.e. internal rate of return at which the current value of cash flow is equal to the current value of costs, i.e. NPV = 0:
IRR= = = 0.1602, or 16.02%.
Since 16.02% exceeds the firm's cost of capital (10%), the proposal to change credit terms should be approved.
Using the approach discussed, any proposed change in credit policy can be assessed. In this case, different variables can be considered and changed until the combination that provides the largest value is identified. NPV.