ACC 2222 – BUSINESS FINANCE 2

REVISION QUESTION - WORKING CAPITAL MANAGEMENT

Tekun Sdn Bhd is a medium size manufacturing company produces textiles. Its main supplier,
Usaha Sdn Bhd, has never offered discounts for early payment so Tekun Sdn Bhd has always
taken the full 40 days’ credit allowed by Usaha Sdn Bhd.

Usaha Sdn Bhd has recently been having problems collecting its debts on time. Following this, a
decision has been made to offer customers a 3.5% discount for all invoices paid within two
weeks (14 days) of purchase.

Tekun Sdn Bhd can invest cash to obtain an annual return of 11.5%.

Required:
a) Determine whether it is financially viable for Tekun Sdn Bhd to take advantage of the
early payment discount. (6 marks)

b) Discuss three features of a credit control system that would encourage customers to pay
on time. (6 marks)

c) In the past, Tekun Sdn Bhd has had problems with its ex-supplier, Gigih Berhad, for
delivering the wrong materials or delivering the materials late. Its prices are so good that
he does not want to buy from anybody else. However, it has been such a problem that he
is considering making all of these purchases at the beginning of January.

Discuss the costs and benefits to Tekun Sdn Bhd for ordering materials early. (8 marks)
(20 marks)
 ACC 2222 – BUSINESS FINANCE 2
REVISION QUESTION - WORKING CAPITAL MANAGEMENT (SOLUTIONS)

(a) Cost of giving up cash discount = % discount x 365

100% - %discount credit pd - discount pd
= 3.5% x 365
100% - 3.5% 90 - 14
= 17.42% (4 marks)
Compare with 11.5% (return on investment), accept the cash discount offer because the cost of
giving up cash discount is higher. (2 marks)

(b) Credit control systems

1. Awareness of supplier’s terms
The customer must be fully aware of the supplier’s terms. As well as the terms being clearly
printed in bold on the face of every invoice, payment terms should be clearly stated in writing
when the order is confirmed.

Even before this time, when the customer account is set up, the contract should state that the
customer accepts the supplier’s terms.

2. Accurate and prompt invoicing

Invoices should be correctly drawn up. The invoice should be totalled correctly and it should
be clear where payment is to be sent to and by what time.
The invoice must be sent out promptly.
3. System of statements and reminders
Your customer should be sent a monthly statement showing, as a minimum, the individual
invoices outstanding, the age of the invoices and the total balance outstanding.

Late payments should always be followed by the issue of a reminder and perhaps a telephone
call. Should the debt still remain unpaid, a final reminder should be issued.

If all else fails and it appears that the customer has no intention of paying, the debt should be
passed promptly to a debt collection agency.

4. Awareness of customer’s systems

It is important to understand the payment system at your customer’s business. Some businesses
make payments to suppliers only once a month. If this is the case, they will have a cut off point
each month by which invoices must be received and processed.

Some businesses have an informal policy that suppliers are not to be paid until a reminder or
even final reminder is received. Some businesses will only pay out a certain amount each month
in order to control their cash flow.

Without this knowledge of client’s systems, debts cannot always be collected promptly.

(2 marks for each well-explained credit control system, total 6 marks)

(c) Costs and benefits of buying all stock at the beginning of the year

Benefits
 will reduce delivery costs since only one delivery will be necessary.
 The company will also benefit from an increased bulk purchase discount
 The materials will also be available as and when required. This means that workers will
not have to sit idle waiting for materials to arrive. There will therefore be a greater
chance of the contract being completed on time.

Costs
 If more materials are left in storage for longer, there is an increased risk of stock loss
either due to weather, or accidents.
 If there is restricted storage space, some materials may need to be stored elsewhere, for
which there will be a cost (e.g. local warehouse).
 Insurance costs will probably rise if greater quantities of stock are to be held at one time.
 There is also the cost of capital being tied up in stock.

(2 marks for each cost or benefit explained, maximum marks for each (i.e costs and benefits) is 4
marks, total 8 marks)