Suppose you work for a small local department store that manages its own account

Question

Suppose you work for a small local department store that manages its own accounts receivable with a private charge card. Your boss has told you to improve the average collection period from 30 to 20 days. How would you go about this? What are the risks in your proposal that might affect the company negatively?

A.

Some ways to reduce the receivables collection period are to be more lenient in granting credit, to decrease the payment period allowed, to decrease the interest charges on continuing balances, to eliminate placing overdue bills with collection agencies, and to write off bad debts less frequently. The risk in each of these steps is more credit sales.

B.

Some ways to reduce the receivables collection period are to be more stringent in granting credit, to decrease the payment period allowed, to increase the interest charges on continuing balances, to place overdue bills with collection agencies more quickly, and to write off bad debts more rapidly. The risk in each of these steps is fewer credit sales and reduced customer loyalty.

C.

Some ways to reduce the receivables collection period are to be more lenient in granting credit, to decrease the payment period allowed, to decrease the interest charges on continuing balances, to never place overdue bills with collection agencies and to never write off bad debts. The risk in each of these steps is more credit sales that may be uncollectible.

D.

Some ways to reduce the receivables collection period are to be more stringent in granting credit, to decrease the payment period allowed, to decrease the interest charges on continuing balances, to place overdue bills with collection agencies more quickly, and to write off less bad debts. The risk in each of these steps is fewer credit sales and reduced customer loyalty.

Explanation / Answer

Answer is B

The reasons are as udner:

1. Being more stringent in granting credit could mean that credit can be given on fulfillment of certain parameters like past payment trend, period of association of customer with the Company, Credit rating of the customer etc. In case of non-fulfillment of prefixed parameters, either cash sales or credit sales with low credit period can be made. This will help in reducing average collection period.

2. To decrease the payment period allowed means customers are asked to pay off the outstanding amount early which again would reduce the collection period

3. Increasing the interest charges on continuing balances would require the customers to pay interest in case of prolonged payment period. As such, to avoid interest payment, customer can be encouraged to pay earlier

4. Writing off bad debts as and when they are identified would reflect true picture of debtors. Also, uncollectible amounts would not appear under accounts receivable.

5. To place overdue bills with collection agencies would help in better collection from debtors as they have expertise in this area

But with all the above steps, the customer might lose his interest in the company and may get inclined to other companies who are offering more lenient credit terms.

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.