Key Terms
Three goals
1. Meet the operational needs of the company 2.
INVENTORY CONVERSION PERIOD (also
Days of inventory) = How long it takes to convert inventory to sales.
RECEIVABLES COLLECTION PERIOD (also
Days sales outstanding, DSO, average collection period) = How long it takes to collect cash after a credit sale.
PAYABLES DEFERRAL PERIOD (also
Days in payables) = How long the company takes to pay its suppliers.
Annual credit sales
$40,000,000
COGS
$30,000,000
Average inventory
$3,000,000 Average AR: $6,000,000 Average AP: $2,800,000
Inventory Conversion
30,000,000 / 3,000,000 = 10 turns; 365 / 10 = 36.5 days Receivables Collection: 40,000,000 / 6,000,000 = 6.67 turns; 365
NET TERMS (full credit period)
The total number of days the buyer has to pay. Net 30 means full payment due 30 days from invoice.
CASH DISCOUNT
A percentage reduction in the amount owed if payment is made early.
DISCOUNT PERIOD
The window of days within which early payment earns the discount.
NOTATION
2/10 n/30 means:
Example
Terms 2/10 n/30 APR = (0.02 / 0.98) x (365 / 20) = 0.0204 x 18.25 = approximately 36.73%
LETTER OF CREDIT
Issued by a bank on behalf of the foreign buyer; guarantees payment to the seller if terms of sale are met. Replaces the
BILL OF LADING
Legal document proving a contract exists between the shipping company and the buyer; used to draw on the letter of credi