FIN.3:5 - Archetypal Grounding

Continue FIN.2’s order, with a day-7 gap of 40 and no required positive reserve. The customer has agreed to pay 96 on day 6 against 100 of the gross invoice, leaving 1,100 on day 28. All other terms are unchanged.

On these grounds the advance adds one more unit of gain and leaves a buffer. This supports the advance for this question, assuming the stated customer agreement. If the customer has merely been asked, the proposed advance remains conditional and is not available for the day-7 payment.

The supplied operating case requires 26–29 rig-hours for 100 units. Twenty hours are usable and a ten-hour block costs 240. Materials cost 200 and supplier service costs 100. Materials and the block require 440 on day 0; the supplier’s 100 is due on day 7. These give the incremental payments of 540. Cutting the ten-hour block to improve a cash ratio removes needed capacity, so it is not the same feasible order alternative.

For a separate 365-day illustration, average inventory 100 with cost of goods sold 500 gives 73 inventory days; average trade receivables 120 with credit sales 730 gives 60 receivable days; average trade payables 50 with credit purchases 365 gives 50 payable days. The cash-conversion cycle is 73 + 60 − 50 = 83 days on these comparable definitions. Shortening that summary still needs the operating and financial comparison above.

FIN.3:5.1 - A stock reduction releases cash once

In a separate constructed two-year trial, operations supplies a feasible lower-stock policy. It avoids a scheduled purchase of 20 now while preserving the current sales receipts, reducing stock by 20. Thereafter it maintains that lower stock, saves storage and handling cash of 3 per year, and loses expected contribution of 4 per year through additional stockouts. These figures are net of all affected operating payments and taxes; the storage saving excludes any financing or capital charge. At the end of year 2 the trial restores the same stock as the baseline by an extra purchase of 20. There are no other differences, and a qualified 10% annual valuation rate applies.

The incremental cash is +20 now, −1 at year 1 and −21 at year 2, including restoration. Its value is 20 − 1/1.10 − 21/1.10² = 1.74. The result combines temporary funding relief with a recurring operating loss. Treating the released 20 as an annual saving would misstate the policy. If expected lost contribution is instead 6 per year, the flows become +20, −3 and −23, with value −1.74. The initially lower cash requirement remains, but the economic preference reverses. Operations must still support the changed service assumption, and FIN.2 must cover the restoration payment.

FIN.3:5.2 - A profitable credit sale can still be unfundable

A separate constructed customer cohort can be obtained only by granting 60 days’ credit. Without that offer, there is no sale to this cohort. Production is feasible within existing capacity; incremental material, labor and delivery payments total 80 now, with no other incremental cost or tax. Invoices total 100 at day 60, but a supported performance estimate gives expected receipts of 96 then. A qualified 1% effective return per 30 days applies to these expected receipts; the credit-loss allowance is already in 96.

The value increment is 96/1.01² − 80 = 14.11. The positive result supports the credit policy on those grounds, but the company has only 50 of cash available above its reserve. It must still obtain 30 by the production date. If the only available offer supplies 30 net now and requires 31 at day 60, that payment belongs in the funded account and its financing consequence must be priced consistently. If no obtainable finance or changed operating term supplies the 30, this sales opportunity is not presently executable.

Now expected receipts fall to 80 because the cohort’s payment behavior changes, with production cost and valuation basis otherwise unchanged. The increment becomes 80/1.01² − 80 = −1.58. A lower observed receivable balance caused by write-offs would not rescue this policy; the lost receipts change its economics.

FIN.3:5.3 - Existing invoices and new sales move on different terms

Consider a separate 60-day transition. Opening unpaid invoices are 60: 40 falls due on day 15 and is expected to produce 38 then; the other 20 is already overdue, with expected collection of 10 on day 45. The proposed policy does not change these invoices or their expected losses. Without the policy, new sales of 100 occur on day 0 and again on day 30, each payable 30 days later. Expected collection is 95% of each invoice, giving 95 on days 30 and 60.

For new sales only, customers accept an offer of a 2% discount for payment 15 days after invoicing. The supported operating scenario raises each new sales cohort from 100 to 120; the expected paying share remains 95%, with the other 5% producing no receipts within or after this comparison. Thus each changed cohort produces 120 × 0.98 × 0.95 = 111.72 on days 15 and 45. Feasible delivery requires cash equal to 70% of the undiscounted invoice amount on the invoice date: 70 per cohort before the change and 84 after it. There are no other costs, taxes or remaining operating differences. Opening usable cash is 80 and the stipulated minimum balance is zero.

Construct both accounts, including the unchanged opening invoices:

On day 30 the no-change account receives 95 from its first new cohort and pays 70 for its second. The changed account has already collected its first cohort and pays 84 for the second. Opening-invoice collections cancel in the incremental column because their terms and performance have not changed; they still belong in each absolute cash account.

The no-change cash path is 10, 48, 73, 83 and 178. The changed path is −4, 145.72, 61.72, 183.44 and 183.44 before any new finance. Earlier collection reduces later receivable funding, but the larger first delivery needs at least 4 of obtainable net finance immediately. Future expected receipts cannot make that payment now. FIN.2 must add the actual financing terms and test the relevant adverse collection cases before the changed policy can be relied on.

Final expected cash improves by 5.44, not just by the margin on the new sales. For each cohort, the additional 20 of sales contributes 20 × 0.98 × 0.95 − 14 = 4.62; granting the discount on the existing 100-sales base sacrifices 100 × 0.02 × 0.95 = 1.90 of expected receipts. Twice their difference is 5.44. Expected noncollection is already in these receipts and is not another expense to subtract from cash.

At a qualified 1% effective rate per 30 days for the specified expected incremental flows, their present value is 6.18, using the corresponding half-period factor for days 15 and 45. If the offer produces no additional sales, the volume and cost remain 100 and 70 per cohort, while discounted expected collection becomes 93.10. The value difference is then −2.83 on the same basis. The commercial response changes the preference; holding quantities equal merely to make the alternatives look comparable would lose the question.

The old overdue 20 remains identifiable in the aging until actual settlement or the applicable write-off treatment changes it. Growing recent sales can improve an aggregate days-receivable measure without collecting any of that overdue balance.

FIN.3:5.4 - An early-payment discount consumes real funding capacity

An invoice for 100 is payable on day 30, or 98 on day 10 under an agreed 2% discount. The company can draw exactly 98 net on day 10 under a separate available loan, with no fees and 1% interest for the 20-day period. It repays 98.98 on day 30. Relative to paying 100 then, using the loan to take the discount saves 1.02 at the same date. There are no other tax, supply or transaction differences in this illustration.

Forgoing the discount costs 2/98 = 2.0408% for 20 days. Using a 365-day effective annual convention gives approximately 44.59%; using simple annualization gives approximately 37.24%. Neither figure changes the actual 1.02 saving or supplies the loan. A fee greater than 1.02 at day 30 would reverse this comparison. A day-10 credit limit of only 90 would leave the early payment short unless another source supplied 8. The decision therefore needs both the price comparison and FIN.2’s dated feasibility result.