k.) Barnes knows that SKI sells on the same credit terms as other firms in its i
ID: 2681249 • Letter: K
Question
k.) Barnes knows that SKI sells on the same credit terms as other firms in its industry. Use the ratio to explain whether SKI's customers pay more of less promptly than those of its competitors. If there are differences, does that suggest, SKI should tighten or loosen its credit policy? What four variable make up a firm's credit policy, and in what direction should each be changed by SKI?
l.)Does SKI face any risks if it tigethens its credit policy?
m.) If the company reduces its DSO without seriously affects sales what effect would this have on its cash position in the short run? in the long run? Answer in terms of the cash budget and the balance sheet, What effect should this have on EVA in the long run?
Explanation / Answer
SKI’s days’ sales outstanding (DSO) of 45.63 days is well above the industry average (32 days). SKI’s customers are paying less promptly. So, SKI should consider tightening its credit policy to reduce its DS
Cash Discounts: Lowers price. Attracts new customers and reduces DSO.
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credit Period: How long to pay?
Shorter period reduces DSO and average A/R, but it may discourage sales
credit Standards: Tighter standards reduce bad debt losses, but may reduce sales. Fewer bad debts reduces DSO
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Collection Policy: Tougher policy will reduce DSO, but may damage customer relationships.
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YES! A tighter credit policy may discourage sales. Some customers may choose to go elsewhere if they are pressured to pay their bills sooner
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Short run: If customers pay sooner, this increases cash holdings.
Long run: Over time, the company would hopefully invest the cash in more productive assets, or pay it out to shareholders. Both of these actions would increase EVA.
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