Supply Chain Management and A/P Impact

Questions and Answers

How can rising labour costs impact a company's payments to suppliers?

Businesses may delay payments to conserve cash. (correct)

Companies may increase payments to suppliers immediately.

Suppliers might extend credit terms indefinitely.

Labour costs have no impact on supplier payments.

What effect can delayed payments to suppliers have on a company's working capital?

It could enhance the company's cash reserves.

It could lead to increased borrowing costs. (correct)

It might improve supplier relationships significantly.

It typically has no impact on working capital.

What is one of the objectives of float management in a supply chain?

To increase the lag in payments.

To reduce supplier credit limit.

To speed up cash collections. (correct)

To minimize inventory turnover.

What is the formula to calculate the percentage change in sales growth year over year?

Cur Sales - Prev Sales / Prev Sales Signup and view all the answers

How do you calculate the effect of sales growth on A/R from the prior year?

Sales Change % * A/R from the Prior Year Signup and view all the answers

Which factor can negatively affect the customer-to-cash (C2C) cycle?

Delays in the supply chain process. Signup and view all the answers

What is the formula to compute daily sales for the year 2002?

Annual Sales in 2002 / 365 Signup and view all the answers

What happens when a business faces tight working capital availability?

The business may need to borrow more money. Signup and view all the answers

How can supply chain processes help maintain healthy cash flow?

By freeing up cash from current assets. Signup and view all the answers

What was the total A/R calculated for 2002?

1440 Signup and view all the answers

What was the percentage change in sales from 2001 to 2002?

-12.15% Signup and view all the answers

What could be a consequence of suppliers withdrawing trade credit?

A business may face a solvency crisis. Signup and view all the answers

What is a potential impact of delays in the supply chain on customer goodwill?

It may decrease future revenue potential. Signup and view all the answers

How is the A/R growth attributed to sales growth calculated?

Sales Growth * Previous A/R Signup and view all the answers

How is the A/R Growth attributed to DOH calculated?

Average Daily Sales * Change in A/R DOH Signup and view all the answers

What formula is used to compute A/R DOH for a given year?

A/R / Annual Sales * 365 Signup and view all the answers

What is the correct formula to calculate A/R DOH using average A/R and sales?

A/R DOH = Average A/R / Sales * 365 days Signup and view all the answers

If A/R DOH increases while sales decrease, what could this indicate about the company's cash flow?

The company is straining its working capital. Signup and view all the answers

What does a larger A/R DOH compared to industry standards typically suggest?

The company might be loosening credit policies. Signup and view all the answers

What does Inv DOH represent in relation to inventory?

The number of days inventory is retained before sale. Signup and view all the answers

What is the relationship between a 10% growth in sales and accounts receivable?

Accounts receivable should ideally increase by 10%. Signup and view all the answers

How is Receivable Turnover calculated?

Receivable Turnover = Sales / Average A/R Signup and view all the answers

What does an Inventory Days on Hand (Inv DOH) of 60 days suggest?

The firm turns over its inventory every 60 days. Signup and view all the answers

What is the value of C2C if A/R DOH is 45 days, Inv DOH is 60 days, and A/P DOH is 30 days?

75 days Signup and view all the answers

What is the importance of assigning a rank of scores to the five C's of credit?

It determines whether to offer credit and establishes a cut-off score. Signup and view all the answers

Which of the following describes a significant risk when a firm discontinues credit to a customer?

Potential conflict between sales and collection departments. Signup and view all the answers

Why is it critical for a firm to monitor accounts receivable (A/R) after offering credit?

To avoid potential payment defaults. Signup and view all the answers

What role do external sources like Dun & Bradstreet and credit reporting agencies serve for businesses?

They offer payment information on potential customers. Signup and view all the answers

What is one key factor in ensuring minimal collection issues for a firm?

Selecting the right customers initially. Signup and view all the answers

How can good supply chain management affect a firm's operations?

It streamlines operations and reduces costs. Signup and view all the answers

What is the primary advantage of factoring for a business?

It provides quicker access to cash. Signup and view all the answers

Which of the following statements about asset-based lending is accurate?

The firm must provide regular reports on its receivables and inventory. Signup and view all the answers

What is a potential drawback of factoring?

It can be very expensive with costs possibly reaching 30-40%. Signup and view all the answers

What type of financing is specifically designed to assist with inventory purchase or manufacturing?

Inventory Loans Signup and view all the answers

In supply chain finance, what entity is primarily financed?

The buyer's confirmed receivables. Signup and view all the answers

How do banks typically manage the cash flow from collateralized loans?

They establish lockbox arrangements to control cash flow. Signup and view all the answers

What is one of the key requirements for obtaining asset-based lending?

The financial institution requires continuous monitoring of inventory and receivables. Signup and view all the answers

Why might a business choose to use inventory loans?

To address inadequate working capital for inventory purchases. Signup and view all the answers

Study Notes

Supply Chain Impact on Accounts Payable (A/P)

Negotiated Payment Terms: Payment agreements can influence cash flow and relationships with suppliers.
Rising Labour Costs: Increased labour costs may lead businesses to delay payments, risking supplier relationships and increasing the need for working capital.
Manufacturing Costs: Similar financial strains as labour costs can result from heightened manufacturing expenses impacting payment timelines.
Sales Growth: Linked to accounts receivable; sales growth affects cash flow and payment terms with suppliers.
Float Management: Crucial for cash collection; involves minimizing delays between customer payments and cash availability.
Settlement Delays: Any delays in supply chain processes delay payment settlements, raising costs and harming goodwill.

Working Capital and Cash Flow

Tight Working Capital Availability: Poor collection practices lead to inventory stagnation, increased expenses, and potential cash crunches necessitating borrowing.
Increased Borrowing Costs: Cash tied up in accounts receivable and inventory leads to opportunity costs and higher interest payments.
Cash Flow Improvement: Efficient supply chain processes can convert current assets into cash, thereby reducing costs and increasing available cash flow.

Cash Conversion Cycle (C2C)

Definition: C2C measures the time taken to convert cash spent into cash received.
C2C Calculation Formula: C2C = A/R Days on Hand + Inventory Days on Hand - A/P Days on Hand.
Example Calculation: A/R DOH = 45 days, Inventory DOH = 60 days, A/P DOH = 30 days, resulting in C2C = 75 days.

Accounts Receivable Days on Hand (A/R DOH)

Purpose: Indicates how much A/R supports sales. Ideally, A/R growth should match sales growth proportionally.
Formula for A/R DOH:
- First Formula: A/R DOH = (Average A/R / Sales) * 365.
- Second Formula: A/R DOH = 365 / Receivables Turnover (Receivables Turnover = Sales / Average A/R).
Example Calculation: For sales of 1,000 and average A/R of 200, both formulas yield A/R DOH = 73 days.

Inventory Days on Hand (Inv DOH)

Definition: Reflects the amount of inventory available to support daily sales, using cost of goods sold for accuracy.
Management Goal: Keep sufficient inventory to support sales without overstocking.

Analyzing Changes in A/R Year Over Year (YOY)

Sales Growth Impact: Calculate the percentage change in sales YOY to assess A/R changes.
A/R Growth from Sales Change: Use sales growth percentage to gauge impact on A/R.
Daily Sales Calculation: Annual sales divided by 365 provides daily sales figures.

Financing Options for Businesses

Factoring: Selling receivables at a discount for immediate cash flow, but at a high cost of financing (30-40%).
Asset-Based Lending: Financing using A/R and inventory as collateral while retaining possession of the assets.
Inventory Loans: Short-term loans for purchasing or producing inventory when funds are insufficient.
Supply Chain Finance: Also known as reverse factoring; banks finance confirmed receivables between buyers and suppliers.

Credit Policies and Collection Management

Credit Assessment: Use the five C's of credit (Character, Capacity, Capital, Conditions, and Collateral) to evaluate creditworthiness.
Monitoring A/R: Regularly administer collection policies and customer assessments to minimize default risks.
Data Sources for Credit Information: Utilize agencies like Dun & Bradstreet, Equifax, Experian, and TransUnion for customer evaluation.

Conclusion

Supply Chain Management: Effective management enhances cash flow through improved C2C and reduced costs.
Proactive Financial Planning: Awareness of financing options and potential issues essential for minimizing costs in supply chain operations.

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Description

This quiz explores how various supply chain activities affect accounts payable (A/P). It includes insights on negotiated payment terms and the implications of rising labor costs on supplier relationships and working capital. Understanding these factors is crucial for effective supply chain management and financial stability.