Page 397 - F1 Integrated Workbook STUDENT 2018

Working capital management – receivables, payables, inventory
and cash

Trade receivables

1.1 Overview

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.

387