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 derive ACP,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 involving sales . The formula for computing profitability (net profit margin)is given below