How to calculate credit sales

how to calculate credit sales


Best Answer: 1- I'm sorry if anything I said previously sounded hostile to u. I never meant to offend anyone.

2- Cost of retained earnings is the same as cost of existing equity; that is the risk-adjusted rate of return that your existing shareholers would require. If we are talking capital budgeting for an under-consideration project, we need to see if such project would achieve economic earnings. i.e. not only recover the explicit costs and create accounting earnings but also recover the costs of the invested funds as expressed in terms of rates that must be met.

Cost of retained earnings is quite high (higher than the interest rate on virtually all regular corporate bonds) and to obtain a good estimate of such rate, u could go for either the CAPM or bond-yield-plus-equity-premium.

If the invested funds are a certain mix of debt and equity, u will need to get a weighted average rate to reflect the cost of funds more accurately.

The average rate u just obtained will be used to discount all projected cash inflows of your contemplated project to see if their present value is positive after netting all the capex and startup outflows. If positive, this means u have a good project that increases shareholders' wealth and may be pursued. If close to zero, u may try a different capital budget with less equity in it, or just reject the venture.

Cost of equity generally changes in accordance with changes in risk profile of the company (or stock market conditions), whereas cost of debt, a.k.a. interest rate,

changes in accordance with changes in credit rating (or bond market conditions).

3- Companies generally sell for either cash or credit. Credit sales are the portion of revenue that is not cashed in immediately. The balance sheet and the income statement are what u need to look at. The term "Accounts Receivable" denotes revenue that was recognized by the company as billed but was not paid yet. Take a car manufacturer. Once a car is sold for credit, ALL of the billed value is booked as revenue on the income statement even though what actually came to the door was only the downpayment.

This increases their accounts receivable by an amount equal to [full purchase bill - downpayment] that is the outstanding credit balance.

If this company's accounts receivable are, for instance, increasing year-on-year (keeps making up a higher percentage of revenue) this means that they are relaxing their credit standards and loaning out a larger portion of their cars rather than selling them for immediate cash. Maybe they are starting to offer longer collection periods. People (technically debtors) will pay the company in installments that might go far into the future and of course there is the risk of default. This is why cash sales are better. Companies do sell for credit quite often, though, because it makes for stronger penetration. Contracts can be structured so that this risk is shifted away from the company but that's another issue.

Ratios related to credit sales include: accounts receivable turnover, accounts receivable average collection period, the cash conversion cycle, the current ratio, and acid test.


Category: Credit

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