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Accounts Receivable

Management

Size of I nvestment in Accounts Receivable

Percent of Credit Sales to Total Sales

Level of Sales

Terms of Sale

Quality of Customer Collection Efforts

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Accounts Receivable

Management

Terms of Sale

Quoted as a/b net c , which means

“deduct a% if paid within b days,otherwise pay within c days.” 

Example: 3/30 net 60 means

“deduct 3% if paid within 30 days,

otherwise pay the entire amount

within 60 days.” 

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Accounts Receivable

Management

Terms of Sale

Annualized opportunity cost offoregoing a discount: 

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x

Accounts Receivable

Management

Terms of Sale

Annualized opportunity cost offoregoing a discount:

a 3601 - a c - b

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Accounts Receivable Management

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  a 360

1 - a c - bx 

Accounts Receivable Management

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  a 360

1 - a c - b

Opportunity cost of foregoing 3/30 net 60:

x 

Accounts Receivable Management

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  a 360

1 - a c - b

opportunity cost of foregoing 3/30 net 60:

.03 360

1 - .03 60 - 30x 

x 

Accounts Receivable Management

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  a 360

1 - a c - b

opportunity cost of foregoing 3/30 net 60:

.03 360

1 - .03 60 - 30

= 37.11%

x 

x 

Accounts Receivable Management

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Inventory Management

Too much inventory is expensiveand wasteful.

Not enough inventory can result

in lost sales.

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Inventory Management

Raw materials inventory - basic materialsto be used in the firm’s production

operations.

Work-in-process inventory - partially

finished goods requiring additional work

before becoming finished goods.

Finished-goods inventory - completed

products that are not yet sold.

Stock of cash - inventory of cash to allow

payment of bills.

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Inventory Management

Optimal inventory order size: theEconomic Order Quantity (EOQ)

model: 

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Optimal inventory order size: theEconomic Order Quantity (EOQ)

model:

2SO

C

Q* =

Inventory Management

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2SO

C

Inventory Management

Q = inventory order size in units

C = cost of carrying 1 unit in inventory

S = total demand in units over planning

period

O = ordering cost per order

Q* =

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Example: Inventory Management

Q = inventory order size in units

C = cost of carrying 1 unit in inventory = 1.25 

S = total demand in units over planning

period = 10,000 units 

O = ordering cost per order = $250 

2SO

C

Q* =

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Example: Inventory Management

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Example: Inventory Management

2SO

C

Q* =

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Example: Inventory Management

2SO

C

2x250x10,000

1.25

Q* =

Q* =

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Order Point Problem

Average EOQinventory 2

= + safety stock