Oxford Blues plc has standard trade terms requiring its customers to pay after 30 days. The average invoice is actually paid after 90 days. A junior executive has suggested that a 2.5 per cent discount for payment on the 20th day following the invoice date be offered to customers.

It is estimated that 60 per cent of customers will accept this and pay on the 20th day, but 40 per cent will continue to pay, on average, on the 90th day.

Sales are £10m per annum and bad debts are 1 per cent of sales.

The company’s overdraft facility costs 14 per cent per annum.

The reduced collection effort will save £50,000 per annum on administration and bad debts will fall to 0.7 per cent of turnover.

Required

a. Should the new credit terms be offered to customers?

b. What are the main considerations you would give thought to in setting up a good credit management system?

Answer rating: 100% (QA)

Yes Offering credit often encourages customers to speed up or increase the amount of their spending Some businesses offer credit to gain a competitive ... View the full answer