Trade Credit Policy Research Articles

Accounts Receivable Management in Nonprofit Organizations

This paper contributes to the discussion about nonprofit organizations’ (NPO) model of financial management in the accounts receivable area. In fact, when it is judged from a technical point of view, the opinion that nonprofit financial management do not differ from a for-profit business could be justified, and is known in nonprofit financial management discussion (Jegers 2011; Hansmann, 1987). But that point of view is only partially right. Sloan et al. and Wedig et al. implemented with modifications a financial management portfolio theory to NPO financial management (Sloan et al., 1988; Wedig 1994, Wedig et al. 1996, Jegers, Verschueren, 2006). In the paper, the model of financial liquidity management in NPOs is presented from the perspective that claims the basic financial aim of an NPO is the most financially effective realization of the mission, resulting in the donors’ support for the organization (Leone, Van Horn, 2005; Eldenburg et al., 2011). It is close in many points to the maximization of for-profit firms’ values, but in fact it has many differences, and non-profit entrepreneurship could attract entrepreneurs more than for-profit organizations (Michalski, 2012; Chapelle, 2010). The net working capital requirements 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, is one of the fields where a difference could be seen. Not many NPOs have to deal with all aspects of liquidity decisions or current assets management. Like for-profit organizations, some of them use only cash from current assets, redistributing it from donors to beneficiaries. Other NPOs collect free-of-charge goods for resale, using this income to realize their mission. Many NPOs are almost identical in operating processes with for-profit businesses, but are nonprofit because of their main mission.An NPO’s management team’s decision about the accounts receivables policy is a balance between gaining new customers by way of a more liberal organization’s trade credit policy and limiting the risk of allowing for delayed payment from unreliable purchasers. That kind of decision shapes the level and quality of accounts receivables (Michalski, 2012). Paraphrasing Keith Smith and James A. Gentry’s observations, it is possible to observe that Robichek et al. (Gentry, 1988; Robichek et al., 1965; Smith, 1973) talk about the risk involved to accounts receivable decisions which must be accepted by financial institutions’ pledging of accounts receivable of the firm. Keith Smith (Smith, 1973; Gentry, 1988) predicted and Michalski (Michalski, 2008) showed how a portfolio theory may be used to decrease the accounts receivable risk. Current assets, and among them accounts receivables, could be viewed in the portfolio context as presented by Friedland (1966; Gentry, 1988). Pringle and Cohn (1974; Gentry, 1988) tried to adapt the CAPM theory to working capital elements. Bierman and Hausman (1970; Gentry, 1988) discuss the granting policy of an organization and shows that trade credit policy requires balancing the future sales gains against possible losses. Lewellen, Johnson and Edmister (Lewellen, Johnson, 1972; Lewellen, Edmister, 1973) explain how and why traditional devices used for monitoring accounts receivable should be changed by new and better ones. Freitas (Freitas, 1973) shows the relationship between liquidity and risk during accounts receivable management. The question discussed in that paper concerns the making of decisions by NPOs in the accounts receivables area.

An Economic Order Quantity Model for Nonconforming Quality Products

The inventory literature is replete with claims on business strategy to maximize operational efficiency and customers' goodwill regarding the quality of products. A service system is composed of a number of entities, such as inventory of resources, trade credit financing, and the prediction of the demand and quality of products, among others. Drawing upon relevant research in inventory theory, in light of trade credit financing for uncertain demand of the customers, this study empirically develops a framework of an economic order quantity model for conforming and nonconforming quality products, while the nonconforming items, a random proportionate of the total products, are sold at a reduced price after a 100% screening process. In general, a trade credit policy is offered to the retailer by the supplier to buy more items. In this point of view, different delay periods with different purchasing costs are settled for the retailer. The associated expected average profit for both conforming and nonconforming products by trading off selling prices, inventory costs, interest earned from selling items, interest charged for delayed payments of purchasing cost, and shortage costs is maximized analytically. Numerical examples are illustrated to justify the model. Sensitivity analysis of the key parameters is also carried out for various issues.

The model and algorithm for determining optimal ordering/trade-credit policy of supply chains

This paper develops a model for determining ordering/trade-credit policy of a supply chain, where one supplier sells a product to a retailer, who faces a deterministic demand, and may offer the retailer two types of trade credit contracts: a “one-part” or a “two-part” contract. We discuss the existence of the optimal solution to the model, and provide a simple algorithm for finding the optimal ordering and trade credit policy of two members. We specify the conditions under which it is beneficial in reducing operational cost for the supplier to offer the two trade credit contracts. Through numerical experiments, we reveal that it is more superior in reducing operational cost for the supplier to offer a two-part credit than to offer a one-part credit, which can be extended to a multi-part credit. The sensitivity analysis is presented at the end of the paper.

Effect of Working Capital on Profitability of Selected Quoted Firms in Nigeria

The article examines the relation between working capital management and profitability for a sample of 66 Nigerian non-financial firms for the period 1997–2007. Trade credit policy and inventory policy are measured by number of days accounts receivable, accounts payable and inventories; and the cash conversion cycle (CCC) is used as a comprehensive measure of working capital management. The results suggest that firm’s profitability is reduced by lengthening the number of days accounts receivable, number of days of inventory and number of days accounts payable. The result shows that shortening the CCC improves the profitability of the firms.

Retailer’s optimal replenishment and payment policies in the EPQ model under cash discount and two-level trade credit policy

The main purpose of this paper is to investigate the retailer’s optimal cycle time and optimal payment time under the supplier’s cash discount and trade credit policy within the economic production quantity (EPQ) framework. In this paper, we assume that the retailer will provide a full trade credit to his/her good credit customers and request his/her bad credit customers pay for the items as soon as receiving them. Under this assumption, we model the retailer’s inventory system as a cost minimization problem to determine the retailer’s optimal inventory cycle time and optimal payment time under the replenishment rate is finite. Then, an algorithm is established to obtain the optimal strategy. Finally, numerical examples are given to illustrate the theoretical results and obtain some managerial phenomena.

Improving the supply chain's performance through trade credit under inventory-dependent demand and limited storage capacity

Abstract The present paper develops a performance-improving model through trade credit for a two-echelon supply chain, where a supplier sells a single product through a retailer who has limited storage space and faces an inventory-dependent end demand. We consider the non-integrated and integrated optimizing model. Under the non-integrated optimizing model, we present how the supplier determines the trade credit period to induce the retailer ordering more so as to reduce the supplier's operating cost and enhance sales volume of products as well. The proposed model shows that the presented trade credit policy can increase each member's profitability but also the profitability of the whole channel. Furthermore, we develop a theorem to efficiently determine the optimal inventory and trade credit policy for the integrated optimizing model.

Integrated Supply Chain Model for Perishable Items with Trade Credit Policy under Imprecise Environment

the purpose of this paper to investigate the integrated cost minimizing strategy with supplier's trade credits offer under fuzzy environment. Supplier permits the retailer a certain fixed period to settle the amount owed to him for the items supplied. Expressions for average integrated inventory cost in fuzzy sense are derived Signed Distance Method is used to defuzzified total fuzzy cost and its optimization with respect to the decision variable is carried out. A numerical example is cited to illustrate the model. A comparison is made between integrated cost policy and the individual cost polices. It is shown that integrated cost policy results in impressive cost reduction. Computer software Mathematics 7.0 is used to derive the optimal policies.

Trade credit policy and firm value

AbstractThis manuscript studies the shape of the relation between firm value and trade credit for a sample of Spanish listed firms in the period 2001 to 2007. Considering the trade‐off between benefits and costs of investing in trade credit, we estimate a non‐linear relationship between accounts receivable and firm value. As expected, the results obtained show a positive relation between firm value and trade credit at low levels of receivables and a negative one at high levels. To give robustness to the results, we analyse whether deviation from target accounts receivable level reduces firm value. Consistent with the previous analysis, we find that deviations from this level of receivables decrease firm value.

Optimal replenishment and credit policy in EOQ model under two-levels of trade credit policy when demand is influenced by credit period

It has been observed that credit period has become a major concern for most of the retailers, because not only it has direct influence on inventory and finance but also on the demand of an item. Unfortunately, the impact of credit period on demand has received very little attention in the literature, whereas in reality length of the credit period offered has positive impact on the demand rate. The impact of credit period on demand may be instant or delayed. The aim of this paper is to determine the retailer’s optimal replenishment and credit policy in EOQ model under two-levels of trade credit policy when demand is influenced by credit period. These types of demand functions are observed in many consumer durables. Results have been illustrated with the help of a numerical example. Computational results provide some interesting policy implications.

An uncooperative order model for items with trade credit, inventory-dependent demand and limited displayed-shelf space

This paper considers a two-echelon supply chain where a supplier sells a single product through a retailer, who faces an inventory-dependent demand. The supplier hopes to incentive the retailer to order more items by offering trade credit. The retailer places the ordered items on the display shelf (DS) with limited space and stocks the remaining items (if any) that exceed the shelf capacity in his/her backroom/warehouse (BW). From the supplier’s perspective, we focus mainly on under which conditions the supplier should offer trade credit and how he/she should design such trade credit policy and corresponding ordering policy to obtain much more benefits. From the retailer’s perspective, we discuss whether the retailer needs BW and exactly how many items need to be stocked in BW when the supplier offers trade credit. We formulate a “supplier-Stackelberg” game model, from which we obtain the conditions under which the presented simple trade credit policy not only increases the overall chain profit but also each member’s profit. We also show that the trade credit policy is always more beneficial to the retailer than to the supplier if it is offered.

Optimal strategy for an integrated inventory system involving variable production and defective items under retailer partial trade credit policy

This paper investigates an integrated inventory model with variable production rate and price-sensitive demand rate under two-level trade credit. The model considers two-level trade credit policy in which the retailer receives a full trade credit from its supplier, and offers partial trade credit to its customers. It is assumed that an arrival order lot may contain some defective items and the number of defective items is a random variable. This study attempts to offer a best policy for retail price, the replenishment cycle, and the number of shipment from the supplier to the retailer in one production run that aims at maximizing the joint expected total profit per unit time. An algorithm is designed to identify the optimum solution of the proposed model. Numerical examples are included to illustrate the algorithmic procedure and the effect of key parameters is studied to analyze the behavior of the model.

The integrated inventory model with the transportation cost and two-level trade credit in supply chain management

This paper takes the transportation cost into account to develop the new supplier–retailer inventory model under the condition that both supplier and retailer have adopted the two-level trade credit policy. Moreover, this paper presents the integrated total profit per unit time Π(n,T) of two decision variables n (the number of shipments from supplier to retailer per production run, a positive integer) and T (retailer’s replenishment cycle length). The main purpose of this paper not only derives the closed-form formulations for the optimal solution (n∗,T∗) of Π(n,T) but also simplifies the algorithm to determine the optimal solution described by Su et al. (2007) [36]. Finally, numerical examples are used to compare with those by Su et al. (2007) [36].

The effect of inflation‐induced demand and trade credit on ordering policy of exponentially deteriorating and imperfect quality items

AbstractThis paper develops an inventory model for exponentially deteriorating and imperfect quality items when a trade credit is offered by the supplier. As it has been seen that the changing rates of inflation do not just have an effect on the ordered quantity but they also stimulate the demand for products, so this paper considers the combined effect of inflation, deterioration, imperfect quality and ‘’ trade credit policy on the economic ordering policy using a discounted cash flow (DCF) approach. In the study, mathematical models are derived under two different circumstances, i.e., Case I: When the discount offered by the supplier with a condition of making the payment by a specified period, M1 is accepted; and Case II: Discount is not taken and instead the payment is made by the end of the full credit period M (M > M1). Finally, a numerical example demonstrating the applicability of the proposed model has been included.

A finite horizon deteriorating inventory model with two-phase pricing and time-varying demand and cost under trade credit financing using particle swarm optimization

In this paper, we consider a deterministic economic order quantity model with generalized type demand, deterioration and unit purchase cost functions under two levels of trade credit policy. Our objective is to find the optimal values of selling prices, replenishment number and replenishment scheme which maximize the total profit over the finite planning horizon. We establish the inventory system and provide structural properties of the optimal solution that facilitate computation. A particle swarm optimization with constriction factor is coded and used to solve the mixed-integer nonlinear programming problem by employing the properties derived from this paper. At the end, some numerical examples are used to illustrate the features of the proposed model.

Inventory Policy with Stock, Price and Credit-Linked Demand

An inventory control problem under two-level trade-credit policy with fuzzy inventory costs is proposed where supplier provides not only a credit-period for settling account but also a cash discount to the retailers. Due to this advantage the retailer also offers a fixed credit period to all its customers to boost the demand. Demand also depends on stock and selling price. A Genetic Algorithm (GA) with chromosome’s life-time dependent varying population size is used to solve the model where, at the time of generation of initial population, diversity in the population is maintained using information entropy theory. In the algorithm crossover probability of a pair of parents is a function of their age-type (young, middle-aged, old, etc.) and is obtained using a fuzzy rule base and possibility theory. A fuzzy possibility/necessity based evolution process is proposed to deal with fuzzy objective function.

Optimal pricing and ordering policy for perishable items with limited storage capacity and partial trade credit

Thangam & Uthayakumar (2010, Optimal pricing and lot-sizing policy for a two warehouse supply chain system with perishable items under partial trade credit financing. Oper. Res. Int. J., 10, 133–161) investigated perishable items with limited storage capacity under a partial trade credit policy. For simplification, they used Taylor series approximations to derive their solution procedures. In our paper, we develop an exact solution procedure that avoids the problem of assuming that the deterioration rate is small, thereby improving the accuracy of the solution but more fundamentally increasing the practical relevance of the solution.

Impact of Providing Trade Credit on Suppliers’ Operational Performance

This paper considers a two-echelon supply chain consisting of one supplier and one retailer. The supplier sells a product to the retailer, who faces a deterministic demand, and may offer the retailer two types of trade credit contracts: a “one-part” or a “two-part” contract. We mainly focus on how the two trade credit contracts influence the supplier's operational performance, and try to explain from the operational perspective why the supplier in practice is willing to offer these trade credits in most situations. We specify the conditions under which it is beneficial in improving performance for the supplier to offer the one-part trade credit, and reveal through numerical experiments that it is more superior in improving performance for the supplier to offer a two-part credit than to offer a one-part credit. Also, we will show how the supplier should set the two trade credit policies to make them more efficient. The sensitivity analysis is presented at the end of the paper.

A joint optimal ordering and delivery policy for an integrated supplier–retailer inventory model with trade credit and defective items

In this paper, we propose an integrated supplier–retailer inventory model in which both supplier and retailer have adopted trade credit policies, and the retailer receives an arriving lot containing some defective items. The customer’s market demand rate depends on the length of the credit period offered by retailer. Our objective is to determine the retailer’s optimal order cycle length, the order quantity, and the optimal number of shipments per production run from the supplier to the retailer so that the entire supply system has maximum profit. We develop an algorithm to find the optimal solution for the supply chain. Several numerical examples are provided to illustrate the theoretical results, and sensitivity analysis of major parameters including the defective rate in a production batch, the retailer’s trade credit period and the customer’s trade credit period in the model are presented.

Vendor-Buyer Deteriorating Inventory Model When Two-Level Trade Credit Policy Is Offered During Recession

In this paper, an integrated inventory model for deteriorating items is analyzed when buyer’s demand decreases with time and price. The supply chain considers the two-level trade credit policy in the vendor-buyer and buyer-customer setup. A simple algorithm is outlined for the joint models to determine the buyer’s optimal pricing and production/ordering strategy. The total profit of the chain increases but that of buyer decreases. To compensate the buyer’s loss due to the cooperative relationship, a negotiation factor is introduced to distribute the profit increase to the vendor and buyer. A numerical example and sensitivity analysis are provided to illustrate the developed model. The result depicts that the total profit of the supply chain increases, although a price discount is offered to the buyer.

Optimal Policy for EOQ Model with Two Level of Trade Credits in One Replenishment Cycle

In general, a supplier/retailer frequently offer trade credit to stimulate their respective sales. The main purpose of this paper is to investigate the optimal supplier/retailer’s replenishment decisions under two levels of trade credit policy within the economic order quantity (EOQ) framework. This paper deals with the supplier/retailer’s inventory replenishment problem under two levels of trade credit in one replenishment cycle. A different approach of two levels of trade credit is used, which give more freedom to the supplier/retailer in business. In addition, the easy-to-use procedure is developed to efficiently find the optimal cycle time for the retailer under minimizing annual total relevant cost. Finally, a numerical example is given to illustrate these results.