1018 Mid Term Assignment Chapter 6 7 8 Chapter 7 Chapter 7

1018) Mid Term Assignment Chapter 6, 7 & 8 Chapter 7 Chapter 7 explains the types of decisions financial managers take to (cash, accounts receivables, inventory) and remain profitable with Assume a company wants to increase their collection policy fro words, currently their policy is 30 days. They have studied the market, and they can increase sales by 10% by increasing the collection period to 45 days. Explain three elements (out of many) that the financial manager will need to consider before deciding. 3- out incurring two much risk. m 30 days to 45 days. Another

Solution

Facts : Various Types of Current assets are Cash, Accounts receivable, Inventory etc.

Objective : Remain Profitable without incurring too much risk

Need : Increase the collection policy from 30 days to 45 days, sales can be increased by 10% by doing this

Three elements to be consider before deciding if to change the policy are as below

1. Interest Portion - Finance Manager need to consider the amount of increase in sales due to change in credit period and need to compare the same with the increase in interest cost due to the same. If the net net interest cost is less than the contribution achieved due to increase in sales then the proposal can be connsidered subject to other risks involved.

2. Recoverability of collection / Increase in Bad debts - The main risk in increasing the credit period is that the sales may be achieved but subsequent the recovery of such debtors shall be difficult or say that there is high probability that the customer shall fail to pay the same hence before increasing such credit period , risk of bad debts should be considered based on past and industry average

3. Quality of Debtors - The quality of debtors should be monitoted before taking such a decision. Say for Eg: If the current bad debts ratio to sales is 1% and industry trend is 2%, it means that the quality of debtors maintained is good and also there might be a scope to increase the collection period subject to quality of debtors entering the sales net. If the net bad debts increase dut to increase in collection period and increase in sales, there might be no economic benefot achieved by doing such thing, hence this is the most important factor while determing the decision of increase in collection period.