Portfolio Management Approach in Trade Credit Decision Making
Romanian Journal of Economic Forecasting, Vol. 3, pp. 42-53, 2007
15 Pages Posted: 7 Jan 2008
The basic financial purpose of an enterprise is maximization of its value. Trade credit management should also contribute to realization of this fundamental aim. Many of the current asset management models that are found in financial management literature assume book profit maximization as the basic financial purpose. These book profit-based models could be lacking in what relates to another ait (i.e., maximization of enterprise value). The enterprise value maximization strategy is executed with a focus on risk that is related to purchasers using payment postponement for goods and/or services. The present article offers a method that uses portfolio management theory to determine the level of accounts receivable in a firm. An increase in the level of accounts receivables in a firm increases both net working capital and the costs of holding and managing accounts receivables. Both of these decrease the value of the firm, but a liberal policy in accounts receivable coupled with the portfolio management approach could increase the value. Efforts to assign ways to manage these risks were also undertaken; among them, special attention was paid to adapting assumptions from portfolio theory as well as gauging the potential effect on the firm value.
Keywords: accounts receivable, trade credit management, incremental analysis, value based management, portfolio analysis
JEL Classification: G32, G11, M11, D81, O16, P33, P34
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