Most of ABC's sales are paid by cash, debit card, or credit card. However, in a few cases, ABC has been asked to extend credit to select clients. To date, ABC has been giving these clients 30 days to pay for the purchase of products or services. However, a couple of major clients are now taking 45 days to pay each invoice issued. ABC has also been doing more work for Software Solutions, which is now asking for 60 days to pay because it wants to collect the money from its own customers before it pays ABC. As a result, Doug, Bev, and Emily have had to pay close attention to the cash available to purchase additional inventory and pay monthly expenses. Although ABC is happy to have taken on the additional work, it is considering reducing the credit terms it is prepared to offer its clients from 30 days to 15 days. As well, it is attempting to establish a consistent credit policy as it continues to discuss with Software Solutions the possibility of providing a significant amount of support service.
Emily has a meeting scheduled with Michael Richards, operations manager of Software Solutions, to discuss their ongoing business relationship. Michael has wanted to meet because the demand for services continues to increase and is anticipated to double over the next year. He would like to have ABC take on more of these activities but wants to ensure that it can meet the additional demand. Emily believes ABC is now better positioned to take on more of these services but first wants to discuss proposed credit terms with Michael. However, before meeting with Michael, Emily wants to consider all of the possible effects of reducing the credit terms from 30 to 15 days.
Instructions
(a) Identify the advantages and disadvantages of enforcing credit terms for ABC's clients of 30 days.
(b) Do you believe that ABC should reduce its credit terms to 15 days? Discuss the advantages and disadvantages of the company doing so.
(c) If ABC decides to continue providing services to Software Solutions and doubles the number of services it provides, what are some of the effects this will have on ABC's operations and cash flows?
(d) Can you provide other alternatives to ABC to encourage clients to pay quicker and on time?