ACCA Financial Management (F9) Certification Practice Exam

To assess the feasibility of increasing receivable days, it is crucial to understand the financial implications that such a decision may entail. One of the significant costs associated with increasing receivable days—essentially allowing customers more time to pay their invoices—is the potential increase in the overdraft balance.

When firms extend the duration of receivable days, they often experience delays in cash inflows. This delay can lead to increased borrowing if the company needs to maintain liquidity for operations, leading to a higher overdraft balance. As the company waits longer for customers to pay their receivables, it might have to rely more on its bank overdraft to meet its financial obligations, which incurs interest and fees, thereby representing a cost to the business.

In contrast, while loss of cash flow and reductions in profit margins can be serious considerations related to changes in receivable days, the primary measurable cost in this context is the impact on the balance of credit and borrowing. The potential decrease in sales would be a longer-term effect rather than a direct cost from extending payment terms, making the increase in overdraft balance the most immediate financial consideration.