Williams Wholesalers Ltd currently asks its credit customers to pay by the end of the month after the month of delivery. In practice, customers take rather longer to pay – on average 70 days. Sales revenue amounts to £4 million a year and bad debts to £20,000 a year.

It is planned to offer customers a cash discount of 2 per cent for payment within 30€days. Williams estimates that 50 per cent of customers will accept this facility but that the remaining customers, who tend to be slow payers, will not pay until 80 days after the sale. At present the business has an overdraft facility at an interest rate of 13 per cent a year. If the plan goes ahead, bad debts will be reduced to £10,000 a year and there will be savings in credit administration expenses of £6,000 a year.

Should Williams Wholesalers Ltd offer the new credit terms to customers?