MSG Team's other articles

12393 Automation in Retail Stores

In the previous few articles, we have already studied the concept of automation as it related to retail warehouses. However, it is important to realize that warehouses are not the only place in the retail sector where automation is possible. Over the past few years, the usage of technology in the retail space has rapidly […]

11711 The Uglier Side of Fracking

The press releases by the United States oil companies will have you believe that fracking is the best thing that has been discovered since “fire”! The newspapers are full of praise for the new technique and how it is likely to bring back the glorious days when America was self-reliant with regards to energy. However, […]

11997 Why Managing Liquidity is Important for Pension Funds?

Pension funds have traditionally been viewed as long-term investors. They are an investment vehicle in which individuals invest over the course of their working lives and remove money only after the age of retirement. Hence, liquidity was not considered to be a very big problem for the pension fund industry until recently. However, in the […]

8855 Debt Funding in Sports Franchises

Sporting franchises are also business organizations that operate just like other business entities. Therefore, just like other business entities sports franchises also require debt in order to fund their business. There have been various institutions such as banks and private equity firms that can provide these required loans to sporting franchises. Prima facie, it may […]

10566 Paper-Work in Job Order Costing

Quotation: The job begins with a quotation given to a client. For the client, all that matters in the quotation are the costs involved. However, for the contractor, quotation is almost a research document. Giving out quotations requires estimation. Contractors usually have fixed methodologies for estimating these costs. A study of past quotations can tell […]

Search with tags

  • No tags available.

It is a myth that financial ratios are to be used only by investors and analysts in deriving a fair valuation for the firm.

In reality, financial ratios are used by a wide variety of people for a wide variety of reasons. A common usage is by the sales department. Usually sales departments in large companies are converted to cash. Managers, therefore have to determine the optimum quantum of credit that must be given to the buyers to receive the fastest possible payment.

The following article will explain a common practice amongst sales managers to achieve a faster repayment from the buyers.

How Credit is Determined

The sales managers have a fair degree of discretion in determining the credit to be given to the buyers. They however have to work within limits set by the organization. The parameter of these limits is usually determined by the following:

  • Internal Credit Policy: Every firm has an internal policy which determines the amount of credit that can be given to the buyers. These policies however only suggest the maximum number of days and such other parameters.

  • Creditworthiness of the Buyer: The sales manager is also expected to look at the creditworthiness of the buyer. This can be done by looking at a credit report, if the buyer is rated by a credit rating agency or by finding out general information from other non-competing suppliers.

Based on a number of factors, the sales manager can give credit to the buyer. However, smart sales managers use ratios to their advantage and this is how.

How Accounts Payable Turnover Ratio Can Help

  • What the Buyer is Used to: The idea is to calculate the number of days in which the buyer usually makes a payment to its suppliers. This can be done easily of the firm is publicly listed or publishes its financials.

    The sales department can calculate the accounts payable turnover ratio from the buyers financial statements. This is the time that the buyer takes on an average to make payments to its suppliers. The sales manager can now design payment terms to induce the buyer to pay up at the earliest.

  • Extend Credit Accordingly: Sales managers usually see if they are in a commanding position while making the sale. They then provide early payment discounts which are slightly lower that the average time the buyer takes to pay. This ensures that the discount is within the reach of the buyer who usually complies making the fastest payment possible.

Article Written by

MSG Team

An insightful writer passionate about sharing expertise, trends, and tips, dedicated to inspiring and informing readers through engaging and thoughtful content.

Leave a reply

Your email address will not be published. Required fields are marked *

Related Articles

What are Common Size Statements ?

MSG Team

Cash Ratio – Meaning, Formula and Assumptions

MSG Team