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Unit 4: The Financing Mix

made by James, the salesman who handled the Glaveston area. James would receive a Notes
3 per cent commission on all sales made Booth Plastics, a commission that would be paid
whether or not the receivable was collected. James would, of course, be willing to assist in
collecting any accounts that he had sold. In addition to the sales commission, the company
would incur variable costs as a result of handling the merchandise for the new account. As
a general guideline, warehousing and other administrative variable costs would run 3 per
cent sales.
Gupta Holmstead approached all credit decisions in basically the same manner. First of
all, he considered the potential profit from the account. James had estimated first-year
sales to Booth Plastics of $65,000. Assuming that Neck Booth took the, 3 per cent discount.
Bajaj Electronics would realize a 17 per cent markup on these sales since the average
markup was calculated on the basis of the customer taking the discount. If Neck Booth did
not take the discount, the markup would be slightly higher, as would the cost of financing
the receivable for the additional period of time. In addition to the potential profit from the
account, Gupta was concerned about his company’s exposure. He knew that weak customers
could become bad debts at any time and therefore, required a vigorous collection effort
whenever their accounts were overdue. His department probably spent three times as
much money and effort managing a marginal account as compared to a strong account. He
also figured that overdue and uncollected funds had to be financed by Bajaj Electronics at
a rate of 18 per cent. All in all, slow-paying or marginal accounts were very costly to Bajaj
Electronics.

With these considerations in mind, Gupta began to review the credit application for Booth
Plastics.
Question

How would you judge the potential profit of Bajaj Electronics on the first year of sales to
Booth Plastics and give your suggestion regarding Credit limit. Should it be approved or
not, what should be the amount of credit limit that electronics give to Booth Plastics?
Source: Sudhindra Bhat, Financial Management – Principles and Practice, Excel Books

Self Assessment

Fill in the blanks:
11. MPBF norms were proposed by the ........................ Committee.
12. ........................ Committee was constituted by the Indian Banks’ Association to examine the
relevance of the concept of MPBF as a method of assessing the requirements of bank credit
for working capital.
13. Business firms borrow directly from public in the nature of ........................ deposits.
14. The establishment of discount houses was suggested under the recommendations of
........................ committee.
15. There are ........................ basic approaches for determining an appropriate working capital
financing mix.

16. ........................ refers to a process of matching maturities of debt with the maturities of
financial needs.
17. ........................ Group was of the opinion that unless measures were taken to check the
tendency for diversion of bank credit for acquiring long term assets, it might assume
wider dimensions.

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