1. what is you thoughts on this discussion post in one paragraph. Please post be
ID: 2650603 • Letter: 1
Question
1. what is you thoughts on this discussion post in one paragraph. Please post below
Working capital refers to the difference arising to current liabilities and current assets where current assets are characterized by significant liquidity. This entails the ability of the asset to be easily converted into cash while current liabilities are regarded as the company obligation that are supposed to be met within a duration of one year.
The element under focus is account receivable, which is a current asset and changes depending on the firm’s policy concerning decisions made to sell products on credit. Essentially, this will change because the company may extend credit facilities to royal customers. Therefore, the products purchased on credit by customers will be received through account receivable.
Primarily, account receivable needs proper management; otherwise, the Felicia and Fred might experience liquidity problem. This is attributed to the organization need for cash to restock their inventory and facilitate their account payable from the supplier. The company should introduce a trade discount of about five percent to a customer that honors their debt within thirty days. As such, through the use of discount, the company will enhance its cash management and reduce account receivable conversion days, subsequently, improving the liquidity situation and increasing their sales revenue.
Accordingly, it is wise and recommendable for the company to embrace efficient account receivable management practice. Through this, the organization will evade the possibility of facing liquidity issues. Therefore, the organization can meet its daily obligation with ease; however, imperfect account receivable management impact will be extended to suppliers in the account payable and overall inventory management because of lack of sufficient fund to restock and honor their account payables obligation. In addition, account receivable management facilitates cash conversion cycle.
Explanation / Answer
Answer - It talks about the Accounts Receivable Part of the Working Capital Managment and its significance . One should have balanced Working Capital with a more Liquid Assets to avoid any delay in Commited Payments and that is the reason why collection of AR effectively is important. however introducing a trade discount of about five percent to a customer that honors their debt within thirty days should be done only after considering the Benefits and Disadvantages because 5 % is a big amount - We need to say what are the general credit terms if it is net 90 and we give discount of 5 % for paying in 30 days than we are actually paying a 5% Interest rate for 2 months ie almost 30 % per annum and therefore a Loan or a short term debt would be a better option ( 10 % to 16% ).
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