Ch. 20: Accounts Receivable and Inventory Management

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Ch. 20 Accounts Receivable and Inventory
Management
? 2002, Prentice Hall, Inc.
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Accounts Receivable Management

• Size of Investment 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 of foregoing a
  discount

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Accounts Receivable Management

• Terms of Sale
• annualized opportunity cost of foregoing a
  discount
• a 360
• 1 - a c - b

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Accounts Receivable Management
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Accounts Receivable Management

• a 360
• 1 - a c - b

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Accounts Receivable Management

• a 360
• 1 - a c - b
• opportunity cost of foregoing 3/30 net 60

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Accounts Receivable Management

• a 360
• 1 - a c - b
• opportunity cost of foregoing 3/30 net 60
• .03
  360
• 1 - .03 60 -
  30

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Accounts Receivable Management

• a 360
• 1 - a c - b
• opportunity cost of foregoing 3/30 net 60
• .03
  360
• 1 - .03 60 -
  30
• 37.11

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Inventory Management

• Too much inventory is expensive and wasteful.
• Not enough inventory can result in lost sales.

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Inventory Management

• Raw materials inventory - basic materials to be
  used in the firms 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 the Economic Order
  Quantity (EOQ) model

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Inventory Management

• Optimal inventory order size the Economic Order
  Quantity (EOQ) model
• 2SO
• C

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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

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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

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Example Inventory Management
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Example Inventory Management

• 2SO
• C

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Example Inventory Management

• 2SO
• C
• 2x250x10,000
• 1.25

Q
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Example Inventory Management

• 2SO
• C
• 2x250x10,000
• 1.25
• 2,000 units

Q
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Order Point Problem

• Average EOQ
• inventory 2