What should be calculated to determine if a discount on receivables is beneficial for the company?

What should be calculated to determine if a discount on receivables is beneficial for the company?

• A. Opportunity cost of capital
• B. Change in receivable days and overdraft difference
• C. Market value of shares
• D. Averaged interest rates

Answer: (B)

To determine if a discount on receivables is beneficial for a company, it is essential to calculate the change in receivable days and the difference in overdraft costs. Analyzing the change in receivable days provides insight into how quickly the company can convert its receivables into cash. If the discount leads to a significant reduction in the days receivables remaining outstanding, this can improve cash flow and reduce the need for borrowing or overdraft facilities. Moreover, understanding the overdraft difference is crucial since receiving payments sooner may decrease the reliance on costly overdraft financing. If the cost savings from reduced overdraft usage thanks to quicker cash flows exceed the cost of providing the discount, it can indicate that the discount is indeed beneficial for the company. This analysis directly links cash flow management with pricing strategies concerning receivables, guiding the company in making informed financial decisions.

To determine if a discount on receivables is beneficial for a company, it is essential to calculate the change in receivable days and the difference in overdraft costs. Analyzing the change in receivable days provides insight into how quickly the company can convert its receivables into cash. If the discount leads to a significant reduction in the days receivables remaining outstanding, this can improve cash flow and reduce the need for borrowing or overdraft facilities.

Moreover, understanding the overdraft difference is crucial since receiving payments sooner may decrease the reliance on costly overdraft financing. If the cost savings from reduced overdraft usage thanks to quicker cash flows exceed the cost of providing the discount, it can indicate that the discount is indeed beneficial for the company. This analysis directly links cash flow management with pricing strategies concerning receivables, guiding the company in making informed financial decisions.