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For example, a painting company would get only paid after the job is completed, or an employee in a company gets paid only upon the end of the month or cycle. Lump-sum taxes are not politically expedient because they sometimes require a complete overhaul of the tax system. Lump-sum taxes are also unpopular when they are assessed per capita because they are regressive and make no allowance for a citizen’s ability to pay. If the government imposes a tax however, the price the consumer pays is different from the price the producer receives because the government takes its cut. If demand is inelastic—if consumers will pay what they must to get the product at any price, consumers will pay the tax and government will appropriate some of their benefit from the transaction .

In his article entitled „Optimal Taxation in Theory”, Gregory Mankiw reviews that current literature in theories on optimal taxation and analyzes the change in the tax theory over the past few decades. Like Diamond and Mirrlees, Mankiw recognizes the flaw in Ramsey’s model that planners can raise revenue through taxes only on commodities but also points out the weakness of Mirrlees’s proposition. Mankiw argues that Diamond’s and Mirrlees’s theory is extremely complex because of how difficult it is to keep track of individuals producing at their maximum levels. Of the hundreds of provisions in the US tax code, for example, only a handful actually impose a tax .

Credit Period vs. Collection Period

If the stock holders prefer cash to additional stock in the company, they can sell the stock received as dividend. The buyer shall make sure to utilize the maximum credit limit for its advantage. The seller should ensure about the creditworthiness of the buyer before extending any credit limit. Extending a credit facility to the buyer enhances the business and the growth of the seller. So, if 8% debt is increased from ` 5,00,000 to ` 10,00,000 the value of firm increases from ` 41,00,000 to ` 42,00,000 and WACC decreases from 9.7% to 9.5%.

This approach assumes that companies prioritize their financing strategy based on the path of least resistance. Internal financing is the first preferred method, followed by debt and external equity financing as a last resort. David Kindness is a Certified Public Accountant and an expert in the fields of financial accounting, corporate and individual tax planning and preparation, and investing and retirement planning. David has helped thousands of clients improve their accounting and financial systems, create budgets, and minimize their taxes. Conditions describe the purpose of the loan as well as the terms under which the facility is sanctioned. Purposes can be Working capital, purchase of additional equipment, inventory, or for long term investment.

optimum credit term exists when

Capital rationing refers to a situation where a company cannot undertake all positive NPV projects it has identified because of shortage of capital. Capital rationing is a situation where a constraint or budget ceiling is placed on the total size of capital expenditures during a particular period. Often firms draw up their capital budget under the assumption that the availability of financial resources is limited. It can be paid in cash immediately or it can wait for a time to be paid by extending credit to its customers. • Granting credit is investing in a customer, an investment tied to the sale of a product or service.

There is a potential for a conflict of interest between the collections department and the sales department. “Earlier this month, we announced that Pepper Money was starting the journey of seeking a banking licence and that we would be considering targeted acquisitions to complement our organic growth plans for the business. We are delighted to have been able to agree the purchase of Optimum Credit, subject to receipt of regulatory approval.

If the unadjusted tax rate was optimal, the assumption is that the net marginal benefit of increased taxation is zero near the optimum rate . If the distortionary costs of capital taxation are then lowered by deductions or credits, then the net benefit of rate increases will become positive, implying the tax rate should be raised. Conversely, the effective tax rate on marginal projects (with returns closer to the „normal” level) will be reduced.

Example of Credit Terms

Production at the minimum point of the long-run average cost curve is called optimum because at it resources of the society are most efficiently used. Due to the risk involved in repayments, the credit providing party always has specific terms related to default. These terms include interest charges, late payment fees, excess payments, or in some cases, termination of a contract. For example, in the above case of Mr. A’s car loan, the bank poses a condition where if Mr. A defaults, interest at the rate of 2% per month shall be charged from the due date until payment of such amount.

In agriculture, extractive industries, wholesale and retail trade, optimum size is relatively small, that is, the minimum point of the long-run average cost curve is reached at a comparatively small output. Thus, an optimum firm is that firm which is producing optimum output (i.e., least-cost output) with the optimum plant. 19.7 the firm is of optimum size if it employs plant SAC4 and uses it to produce OQ. Since the point of minimum cost of the optimum plant SAC4 coincides with the minimum point of the long-run average cost curve, the optimum firm can also be defined as one which produces at the minimum point of the long-run average cost curve . This means that optimum firm is one which operates at the lowest point of long-run average cost curve of production.

Days of sales outstanding − It is a ratio of receivables outstanding to average daily sales at a particular time. According to DSO, the accounts receivables are considered to be in control if the DSO is equal to or less than a given norm. However, as with any tax, implementing higher taxes will negatively affect incentives and alter an individual’s behavior. In his article, like much of his research on this topic, he chooses to focus primarily on how households are affected. Feldstein recognizes that high taxes deter people from actively engaging in the market, causing a lower production rate as well as a deadweight loss.

Our human approach to underwriting allows us to reach a fairer outcome for a broad range of customers. At Pepper Money, we understand that not everyone has a perfect credit history or receives income, in the same way, each month. Default terms are more stringent and sometimes lead to the cancellation of contracts or recovery from the sale of the borrower’s other assets. Credit Card rental, typically on an annual basis, is to be paid as decided between provider and service availing party. The beneficiary is allowed a time benefit , so the transaction can be settled before the actual payment.

optimum credit term exists when

19.7 for producing output OQ, the plant of SAC4 is being utilized to produce its optimum output OQ, that is to say, it is being used at its full capacity. The party which avails credit from this service provider transfers its risks to the service provider optimum credit term exists when in exchange for some charges by the provider. Hence it is free from credit risk, which benefits them to make the required transaction in time without delay. But on the other hand, the service provider is said to be the buyer of such risk.

Debt is also cheaper than equity because companies get tax relief on interest, while dividend payments are paid out of after-tax income. When a company requires cash-on-delivery terms, the credit period is zero days, and the collection period is also zero days. The credit period does not refer to the amount of time that the customer takes to pay an invoice, but rather to the period granted by the seller in which to pay the invoice. Thus, if the seller allows 30 days in which to pay and the customer pays in 40 days, the credit period was only 30 days. If the seller is requiring multiple payments over time, the credit period is the interval from when credit is first extended until the last payment is supposed to be made by the customer. Thus, if the seller allows for three monthly partial payments, with the last payment due in 90 days, the credit period is 90 days.

customers. Last year SelWel clocked sales of Rs 200 cr. Average

Instead, most of those provisions help to define how much income a taxpayer has—that is, their ability to pay. Even after the code has answered all the technical questions and determined a taxpayer’s taxable income, normative questions remain as to whether they have the same ability to pay. This can be seen as an attempt at horizontal equity, reflecting a judgement that taxpayers supporting families have less ability to pay than taxpayers with the same income but no dependents. However, if both supply and demand are elastic—producers will make less at a lower price and consumers will buy less at a higher price—then the equilibrium quantity will decrease. There may be a consumer willing to buy at a price for which a producer is willing to sell, but this Pareto optimal transaction does not occur because neither is willing to pay the government’s cut.

An optimal capital structure is the best mix of debt and equity financing that maximizes a company’s market value while minimizing its cost of capital. It involves optimization of resources available for holding stock of various materials. If there is shortage of inventory, it leads to stock-outs, causing stoppage of production and a very high inventory will result in increased cost due to cost of carrying inventory. The first one which is granted by the creditors is considered unfit as it affects intermediate product meaning the credit reputation of the firm. Of course, in the absence of cash discounts, there is a good possibility that such costs are hidden in the prices of the goods which may be impossible to measure’.

Debt may be in the form of debentures bonds, term loans from financial institutions and banks etc. Credit terms refer to the conditions agreed between the buyer and the seller as a part of the agreement regarding the payment for the goods and services transferred. The terms provide for the timing within which the buyer shall make the payment to the seller and any other condition related to such a credit period extended. When a firm expands its size to the lowest point of the long-run average cost , it sets up a plant which, given the state of technology, has the lowest unit cost of production when operated at its full capacity. As has been explained above that long-run average cost of a firm is influenced by the various economies and diseconomies of scale.

These conditions include thelength of the credit periodand thecash discount given for prompt payment plus any special terms, such asseasonal datings. For example, credit terms of “net 30” mean that the customer has 30 days from the invoice date within which to pay the bill and that no discount is offered for early payment. An annuity is the payment or receipt of equal cashflows per period for a specified amount of time. For example, when a company set aside a fixed sum each year to meet a future obligation, it is using annuity.

​Missing a payment

People earning lower incomes would then pay more as a percentage of their income than higher-income earners. A tax on the unimproved aspects of land tends to be a progressive tax, since the wealthier one is, the more land one tends to own and the poor typically do not own any land at all. One type of tax that does not create a large excess burden is the lump-sum tax. A lump-sum tax is a fixed tax that must be paid by everyone and the amount a person is taxed remains constant regardless of income or owned assets.

Should the company go in for higher discount proposed by the Sales Manager? 2 thoughts on “Determination of Potential Credit Policy including Credit analysis, Credit Standards, Credit Period, Credit Terms, etc. Determination of Potential Credit Policy including Credit analysis, Credit Standards, Credit Period, Credit Terms, etc.


The expected cost of raw materials, labour and overheads per unit of production. Yes, Optimum Credit Homeowner loans to consolidate existing debts are 4.3% APR. By clicking Submit and ticking the box above you agree to be contacted by an FCA authorised advisor and confirm that you have read and agreed to our Terms & Conditions and our Privacy Policy.

The consumer then buys something less desirable and the producer makes something less profitable , so that the economy is no longer producing the optimal mix of products. Moreover, the sale does not occur, so the government never collects the revenue that was the whole reason for the distortion. This is the deadweight loss—the government has not merely taken a cut of the benefits from the exchange, it has destroyed those benefits for all three. The weighted average cost of capital calculates a firm’s cost of capital, proportionately weighing each category of capital. The irrelevance proposition theorem is a corporate capital structure theory that posits that financial leverage has no effect on the value of a company.

Optimal tax theory or the theory of optimal taxation is the study of designing and implementing a tax that maximises a social welfare function subject to economic constraints. The social welfare function used is typically a function of individuals’ utilities, most commonly some form of utilitarian function, so the tax system is chosen to maximise the aggregate of individual utilities. Tax revenue is required to fund the provision of public goods and other government services, as well as for redistribution from rich to poor individuals. However, most taxes distort individual behavior, because the activity that is taxed becomes relatively less desirable; for instance, taxes on labour income reduce the incentive to work. The optimization problem involves minimizing the distortions caused by taxation, while achieving desired levels of redistribution and revenue. Some taxes are thought to be less distorting, such as lump-sum taxes and Pigouvian taxes, where the market consumption of a good is inefficient, and a tax brings consumption closer to the efficient level.

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