Gurj Kaur coursework

Accounting and Finance

Coursework: Borboleta

Task A
Credit Policy Analysis
One Month Debtor Collection Period
Sales Price 20
Marginal Cost per Unit 17
Current annual sales 4.8 Million
Therefore;
Total Revenue= sales price x current annual sales= 4.8 x 20 = 96 million
When sales increase by 3 % it means that the total revenue will be

103 x 96
100

= 98.88

Million if the sales price remains 20

The increase would result in 25 % increase in sales meaning the total sales will be;
125 x 4.8
= 6 Million
100
This change means there will be an increase in annual sales by2 Million. However, there
will be an increase of additional stocks by 200,000 and creditors by 40,000.
The total revenue for the new total sales will be;
6 x 20= 120
The total percentage increase of revenue or the contribution margin will be;
= 25 %

Decision/ Advice
Borboleta Company should allow its customers to take the longer credit of two months and
do away with the current credit policy of one month. The reason why this should be is that;

The return on investment or the profit that Borboleta generates increases by 25 % which
is even above what Borboleta Company needs. They need a least a 20 % return on

investment. Therefore, two months credit terms are much better.

Current annual sales increase by 2 Million
The increase of the credit policy for all customers by two months ensures that there is
uniformity for both new and existing customers. All clients will work on equal credit
terms meaning that the business will retain its profit as well as its competitiveness
Task B

Allow existing customers to continue with their payment policy of one-month credit
conditions and let the customers take two months credit terms.

When Borboleta Company opts for this option, they increase the risk of having bad debts as
they are not aware of the creditworthiness of the new customers.

Sales will increase, but debtors will increase as well as the new customers are the debtors in
this case. The client's qualification differs as new customers have an extended payment
period of two months. Existing customers might feel discriminated. It could be wise if this
arrangement were converse whereby existing customers take a credit payment policy of two
months while the new customers take a credit payment policy of one month. This plan will
allow the managers of Borboleta Company to evaluate the creditworthiness of the new
clients. Again, Borboleta Company might not get the 20 % return on investment they
envision.
According to (Davis & Davis, 2012), businesses should be aware of the risk associated with
allowing new customers to take more debt. The danger of losing is high as the business has
not determined the creditworthiness of the new clients.

Advice / Decision
Borboleta Company should not allow new customers to take more debt following the
extended collection period from one month to two months. However, to take care of loosing
from the new customers, Borboleta should have;

Strict terms and conditions for supplying goods on credit to new customers

Establish customer qualification criteria

Establish clear procedures for collecting debt from new customers

Develop a method or steps to undertake for clients who default paying the debt. This
approach is called collection policy and is executed in case of delinquent customers.

Task C
Supply chain finance is a set of solutions that optimizes your financial supply chain and for
your trading partners. With supply chain finance it can improve different aspects such as
improve margins, can reduce risk in the supply chain and optimize working capital. In most
cases it is used by buying organisations to increase their payment terms to their suppliers,
while at the same time it is allowing these suppliers to get payed earlier at attractive terms.
This is because the financing fee is only based on credit worthiness of the buyer.
For example, a large manufacturer called open sky platform, buys its products from
thousands of suppliers across the globe. The automotive manufacturer wants to improve his
cash flow and working capital by increasing his payment terms from 60 to 90 days. By
uploading the approved invoices from the automotive manufacturer to the open sky platform,
the suppliers on their side have the opportunity to improve their cash flow by getting paid
earlier. On day 10 out of 90, the early payment to the supplier is done by a third party funder
who receives a guarantee from the buyer to pay the invoices at day 90. Based on this
guarantee the suppliers can choose open sky platform to trade their invoices and get paid
earlier at a low financing rate which will be deducted from the invoice.
As a result, with supply chain finance a buyer can increase his payment terms and improve
his working capital while his suppliers have the option to get paid earlier. This optimizes the

whole supply chain and reduces the risk of disruptions while improving the relationship
between the trading partners.
Working capital management is concerned with the problems that arise in attempting to
manage the current assets, the current liabilities and interrelations that exist between them. It
refers to part of the firms capital, which is required for financing short term or current assets.
Current assets refer to those assets which in regular course of the business can be converted
into cash within one year without disrupting the operations of firm e.g. accounts receivables
and inventory. Current liabilities are those liabilities that are intended to be paid in the
ordinary course of the business within a year, out of the current assets or the earnings concern
e.g. accounts payable, bank overdraft and outstanding expenses.
How is supply chain finance altering the traditional role of working capital management?
Supply chain finance has changed over the past years as it involves taking an approach to
achieve a range of benefits that improve efficiency and visibility across supply chain and to a
more positive working capital. It provides the appropriate financing facilities at relevant
points in the physical supply chain. Consider a buyers perspective, offering him finance will
represent an opportunity to manage relationships with suppliers and increase their payment
terms without causing a damage between trade parties. If we look at a suppliers perspective,
the benefits will improve their cash flow along with reducing a days sale that is outstanding
which can moderate the need for working capital during production process. While traditional
trade finance tends to be focused on individual transactions and strength of participants
balance sheets. In this case traditionally, the supply chain finance considers trading
relationship entirely and is more surrounding, this changes the nature of global trade flows.
Change is felt through diversification of the supply chain (Sarjan et al., 2016). In an article he
stated that shift is being observed by the trade level where working capital strategies have to
adapt to these trends. The author states that working capital management is sophisticated and
will further increase because of the developing markets that are emerging e.g. Asia Pacific.
This is because trade and financing are linked together which means non-traditional and
working capital will contain to gain power in the region. Since 2008-2009 it has become
difficult for many businesses to access equity because the pricing of external financing has
become less attractive. Such as bank facilities for financing work capital is becoming
fundamental for culture.

The author then signifies that businesses have partnered with global sales team in order to
gain control over their organisations working capital strategies. They have done this by
increasing days payable outstanding by extending time to pay their suppliers which helps
them to improve their own working capital. Technology is playing a major role in the
accounts payable within the supply chain. This is because of card solutions that are used in
travel and expenses to make transaction from refined working capital solutions.

How a negative interest rate policy affects a firms opportunity cost of capital?
A negative interest rate means central bank or even private banks will charge negative
interest. Instead of receiving money on deposits, depositors must pay regularly to keep their
money with the bank. This intends banks to lend money more freely and businesses along
with individuals to invest, lend and spend money rather than pay a fee to keep it safe.
The negative rates are the policy decisions taken by central banks but has also effected the
bond market, where investors buy and sell the bonds or debts of government and large
companies. The cost of borrowing is set when the bonds are issued. This depends on how
much financial firms who buys the bonds pay for them and what they buy is a promise where
they have to make a series of payments in future. If the price is high, the borrowing cost in
effect to interest rate can be zero or even negative.
Negative interest rate does affect a firms cost of capital as it influences on currency level
(Mather et al., 2016). The author states the currency policy is designed to overpower
competitive gain and national policies which are negatives for global growth. Bank interest
margins are reduced and the cost of capital is increased as it spreads on debt and equity. For
example, insurance companies and pension funds will come under the stress as future returns
makes it harder to deliver commitments to policyholder and pensioners.
There was a change in the policy known as monetary policy (Crook et al., 2016). This is
where there was problems and consequences that begun negative interest rates specially in
global markets where complications have arisen. Causing firms problems with their costs,
the European banks suffered because of a renewed market. The author then describes that
bank deposits in European central banks pay -0.3% and are going to have further cut. This
effects the firm because it encourages the bank to lend more money and to lower the cost of
capital for riskier borrowers. Negative rates will lower bank profits. Because of this the banks

will have to pass negative rate to various customers, borrowers and lenders. The bank of
Japan adopted negative rates where it controlled the new policy so that it works with margin
of bank balance with central bank. This leads to them not having to pass change through to
depositors (Crook et al., 2016). There is a lower bound interest rates.
Negative rates are an indication that traditional policy has proved to be ineffective, rates
below zero has not been used before in economy (Goldstein, 2016). They are intended to
produce an incentive to spend rather than save which pushes prices up. Europe and Japan
have resorted to negative rates in order to reduce risk of deflation which has effects e.g. debt
payments.
Central banks have direct control over short term rates. But these tend to cause a drop in long
term rates that are governed by supply and demand. If the cost of capital is affected in the
firm, it will affect the market price of assets that they buy (Goldstein, 2016).
In my opinion negative rates will remain an incentive to save only if a short term bond keeps
your money safe than your other assets. Negative rates will affect a firm depending how
negative it gets. If there is inflation, then the cost of living will go up. I think the concern is
that negative rates if passed onto bank customers it will cause firms to stop using the
traditional savings. They will eventually not put money into the bank and just store it. On the
other hand, if negative interest become widespread, it may affect inflation. Money could lose
its value which will lead to consumers and firms to bid up their prices for goods, services and
labour. This can cause deflation, effect on discouraging spending and opposite of what
negative interest rate policy is intended to do.

References
Davis, C. E., & Davis, E. 2012. Managerial accounting. Hoboken, NJ: John Wiley & Sons.