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    Profit impact if relax credit standards with sales drop

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    What would be the impact on each of the 3 wheels (cash,profit,ROE) if a firm decides to relax credit standards in response to a decline in sales? Assume the firm does not have any cash sales.

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    Solution Preview

    The best way to think this through is in two steps. First, what will happen if a firm relaxes credit standards? They are going to sell to somewhat less worthy credit risk customers. So, some customers won't pay. But many of the new customers who would have been turned away prior to the new standards, will buy and pay. Now, how does this impact the three wheels?


    Cash flow will go up, but not as fast as sales since some will never be collected. ...

    Solution Summary

    The solution is 326 words and explains how relaxing of credit impacts transactions and how those transactions will impact cash, profits and return on equity.