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Working capital management – Accounts receivable and payable

Accounts receivable

1.1 Objectives

Management must establish a credit policy. The optimum level of trade credit
extended represents a balance between two factors. This trade-off is a key factor in
determining the entities working capital investment.

Liquidity – Collecting
sales receipts as
quickly as possible to
reduce the cost of
financing the
receivables balance.

Profitability –
Extending the credit
period to customers to
encourage additional
sales.

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