Value Based Trade Credit Decision Making

Problems of Company Value Management, pp. 173-180, 2007

11 Pages Posted: 7 Jan 2008

See all articles by Grzegorz Michalski

Grzegorz Michalski

Uniwersytet Ekonomiczny we Wrocławiu - Faculty of Engineering and Economics

Abstract

The basic financial aim of an enterprise is maximization of its value. At the same time, both theoretical and practical meaning is researched for determinants that increase the enterprise value. Financial literature contains information about numerous factors that influence enterprise value. Among those contributing factors is the extent of the net working capital and the elements shaping it, such as the level of cash tied up in accounts receivable, inventories, the early settlement of accounts payable, and operational cash balances. The greater part of classic financial models and proposals relating to optimum current assets management was constructed with net profit maximization in mind. This is the reason why these models need reconstruction in order to make them suitable to firms that want to maximize their value. The decision if extent the trade credit terms, is a compromise between limiting the risk of allowing for the payment postponement from unreliable purchasers and gaining new customers by way of a more liberal enterprise trade credit policy. This decision shapes the level and quality of accounts receivable. The question discussed in this article concerns the possibility of using value based approach in making decisions about selecting which customers should be given trade credit.

Keywords: accounts receivable, trade credit management, incremental analysis, value based management

JEL Classification: G32, G11, M11, M41, D81, O16, P33, P34

Suggested Citation

Michalski, Grzegorz, Value Based Trade Credit Decision Making. Problems of Company Value Management, pp. 173-180, 2007. Available at SSRN: https://ssrn.com/abstract=1081255

Grzegorz Michalski (Contact Author)

Uniwersytet Ekonomiczny we Wrocławiu - Faculty of Engineering and Economics ( email )

ul. Komandorska 118-120
Wroclaw, 53-345
Poland

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