WORKING cAPITAL - Case Study Example

m, so it not only shows a poor condition of accounts receivable turnover but is also effecting the overall profitability of the firm, that’s why it is a matter of concern to the board of directors. Yes they are very much justified in their demand for tighter credit policy, because current loose credit policy is affecting overall profitability of the firm, so in order to meet overall strategic goals of the firm tighter credit policy is now necessary for the firm. Calculate the cost of foregoing the 2% cash discount offered under the 2/10 net 30 and 2/10 and net 60 terms respectively.

Given that most retailers could take short term loans from banks at a rate of 16% or less, evaluate the attractiveness of each policy. It means that cost of foregoing cash discount is 37.24% which is much more than the cost of borrowing funds from bank i.e. 16% so it is much attractive for the customers to avail cash discount under 2/10 and net 30 policy. To speed up collections and reduce receivables, company can use collection specialists; accounts receivable management software and can adopt the policy of imposing penalties and charging interest for late payment.

This slow buildup in accounts receivable have occurred due to extremely liberal credit policy that has been in place. As all of the customers were allowed a 60 days credit term without any proper credit evaluation and proper terms. Moreover, neither any penalty was imposed for late payment nor any discount was offered for timely payment. Develop the pro forma financial statements for the company under the two credit policy alternatives, i. e. 2/ 10, net 60; and 2/ 10 net 30 using the assumptions given.

What would be the impact on the firms return on sales, return on investment, and return on