Page 205 - 5.2 i. Manac Finance ITC Summarised Notes
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MANAGEMENT OF WORKING CAPITAL
The management of creditors
Example:
Z Ltd’s credit terms are 2/30 net 60 (i.e. a 2% discount is offered for payment made within 30 days,
otherwise payment must be made at the end of 60 days). The company’s bank overdraft rate is
14%.
The cost of not taking the discount: Depends on number of operating days
Discount x 365 in the year (read question).
100 – discount n
n = Reduction in payment period to
= 2 / (100 – 2) x 365 / 30 qualify for discount
= 24.8%
Cost of taking the discount:
14%
Therefore rather lend the money at a cost of 14% so that you can take advantage of the discount.
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