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This posting discusses extending terms of A/R

In this equation below I we formed peer questions for our weekly brainteasers please help us solve.

You have a sole-proprietorship merchandising business dealing with photography equipments. The business was established three years back, and it had an average annual turnover of $50,000. However, over the last six months, the monthly sales have fallen considerably. To reverse this downward slide, you are considering selling the products on a credit basis of 15 days to all your regular customers. There are approximately 25 -30 such customers. In turn, you also plan to ask your vendors to increase the credit period from 15 days to 25 days for all payments. Is buying or selling the products on credit basis a good decision?

1. The business is struggling. What if your customers do not pay? Won't you still be liable to your suppliers? Would you give all your customers credit, or would you qualify them somehow as to their credit risk?

2. How will you qualify the customers as to whether or not they are a good credit risk?

3. What would you do to determine why the business was lost? Was it competition? Was it better product? Location? Prices?

Solution Preview

Is buying or selling the products on credit basis a good decision?

The pros and cons would have to be weighed in this scenario. By increasing the credit period from vendors, you're going to carry accounts payables for a longer period of time. This might not be a problem in the short-run, but will be a factor if you try to obtain any type of bank or creditor financing (trying to get a business loan or loan for equipment, for instance). You would then need to justify why it's taking you longer to pay for regular purchases. It would extend the payment cycle, which can negatively affect cash flow. If you don't have the cash now to cover the purchases within 15 days, as soon as the cash comes in (over a 25 day period), it will be ...

Solution Summary

The solution provides a detailed discussion of extending the terms of A/R and credit risk to the company.