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Variables Credit Sales % discount offered % credit cust with valid discount DSO valid discount % credit cust with nonvalid discount DSO nonvalid discount DSO nondiscount takers Bad Debt/Sales Potential Credit Variables Financing Cost Current Policy Proposed Policy $ 1,048.80 $ 1,048.80 0% 30% $ 1,048.80 $ 1,363.44 48% 50% 35% 35% 1/10 net 30 90% 0% 0% 10 0% 51 3% 90% 1.0% 30% 10 5% 20 45 3%
6.50%
6.50%
Generated Data: Sales Discount Amount DSO all sales A/R Cost A/R Bad Debt $ $ $ $ $ 1,048.80 45.81 131.63 4.57 31.46 $ $ $ $ $ 1,363.44 3.68 29.93 85.99 3.33 40.90
DSO All Sales: Current Policy: Customers Taking Valid discount Customers Taking Nonvalid discount Customers Not Taking discount Proposed Policy: Customers Taking Valid discount Customers Taking Nonvalid discount Customers Not Taking discount
DSO 10 51
10 20 45
30% 5% 65%
Output Data: Current Policy: Cost Discount Cost A/R Bad Debt Net Profit Proposed Policy: Cost Discount Cost A/R Bad Debt Net Profit CCC = AAI + ACP - APP $ $ 4.57 $ 31.46 $ 331.09 AAI = ACP = APP = CCC =
2005
Projected 2006 228.61 AAI = 228.61 45.81 ACP = 29.93 3.63 APP = 30.00 270.80 228.54
Proposed Income Statements: Gross Sales Discounts taken Net Sales Costs of Goods Sold Net Income pre credit Credit-related costs: A/R carrying cost Bad Debt Losses Net before Tax Taxes (35%) After-tax profit Current $ 1,048.80 $ $ 1,048.80 $ 503.40 $ 545.40 $ $ $ $ $ 4.57 31.46 509.37 178.28 331.09 New Policy $ 1,363.44 $ 3.68 $ 1,359.76 $ 679.88 $ 679.88 $ $ $ $ $ 3.33 40.90 635.65 222.48 413.17
Benefit Provided from Improving the Cash Conversion Cycle Original Sales $ 1,048.80 COGS $ 503.40 AAI 228.61 ACP 45.81 APP 3.63 CCC 270.80 Inventory $ 656.90 Receivables $ 131.63
$ $
5.00 783.53
Conversion Cycle Improved $ 1,048.80 $ 503.40 228.61 29.93 30.00 228.54 $ 656.90 $ 85.99
$ $ $