For the latest financial year, the Square Peg Pte Ltd ("Square Peg") generated turnover of $50 million. Purchases from suppliers make up 70% of sales. Based on the latest review, Square Peg's customers, which mainly comprise the small and medium enterprises ("SMEs"), typically take 80 days on average to settle their accounts although the company requires them to pay within 60 days. On the other hand, Square Peg usually pays its suppliers after 45 days. One of its suppliers has recently approached Square Peg to offer an early settlement discount of 0.50% if the company is able to settle its accounts within 30 days. This supplier makes up 10% of Square Peg's annual purchases. If Square Peg were to take up the early settlement discount, administration costs are expected to increase by $200 per year. Square Peg's chief financial officer ("CFO") is currently evaluating its working capital management situation. The company is able to finance its working capital from an existing overdraft facility which charges 8% per annum. Assume 360 days in a year.

(a) Appraise whether Square Peg's CFO should accept the early settlement discount offered by its supplier.

(b) Critically discuss how Square Peg can improve its trade receivables management.

Answer rating: 100% (QA)

a To appraise whether Square Pegs CFO should accept the early settlement discount offered by its supplier we need to calculate the cost of not taking ... View the full answer