Profitability
Profitability is another possible factor that could influence ACP.Typically,credit management is unlikely to be a company's mainstream activity because it is likely to obtain only a marginal profit from extending credit to its customers.Thus,arguably,only more profitable companies would be able and willing to extend longer credit to their customers.This means that a more profitable company would be expected to have longer ACP.Conversely,it could be argued that companies would be more profitable if they collected their trade credit faster,thereby reducing opportunity and financing costs as well as bad debts.In other words,a company with a shorter ACP would be expected to have a higher profit.This later argument contends that trade credit collection influences profitability,rather than the opposite.Thus,to gain an insight into the actual relationship between ACP and profitability,it must be determined empirically.
Profitability too can be measured in many ways.Here,we have used net profit margin as the measure of profitability.It is simply the net profit stated as a percentage of sales.Generally,higher net profit margin means higher profit per Ringgit of sales,but it also means lower operating and interest costs per Ringgit of sales.Thus,net profit margin is computed by dividing net annual profit with total annual sales.Note,again,that although the total annual sales amount has also been used to deriveACP,it is not modified or adjusted in computing profitability.Again,this is because it would not be possible to come up with an alternative measure of profitability without involing sales.The formula for computing profitability (net profit margin)is given below