Investment in debtors must be worthwhile. In the simplest case, a business that is considering a change of policy from cash on delivery to granting credit would do so only if it estimates that additional profit earned on increased sales will yield a return greater than the opportunity cost of capital. Further changes in policy on credit must always meet the same criterion of profitability. The consequential effects on stock levels and cash flow of changing credit policy must also be taken into account. For example, an extension of credit terms to encourage sales will increase debtors but may also push up stock levels required to support this higher level of sales. Cash flow will also be affected by delayed payment by debtors. Investment in debtors can be released by factoring or invoice discounting but this can be fairly expensive unless, in the case of factoring, it is outweighed by considerable improvement in debt collection by the factor.
KeywordsCash Flow Stock Level Potential Customer Total Debtor Credit Period
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