A small construction equipment rental and sales business has customers of two main types: retail consumers who rent equipment on a short-term basis and pay by cash or credit card, and business customers who may rent higher- valued equipment for longer periods of time. These longer-term contracts are more profitable because they minimize nonrental times for the equipment. The company offers sales on account to qualified business customers.

At a monthly management meeting, there are two agenda items that require a decision:

1. The average collection period of accounts receivable is increasing from about 45 days last year to over 60 days this year.

2. The company has the opportunity to bid on a local government equipment supply contract. This contract would increase its overall sales volume by 20%, but the collection period for contract payments could stretch to 120 days.

Instructions

After the class has been divided into groups and you have been assigned one of the two agenda items identified above, do the following:

(a) Discuss the effects on cash flow, the risks for the business, and suggestions to improve the company's financial operations for your assigned item.

(b) Identify any missing information that would be helpful in analyzing the situation.