Question

1. What would happen if your banker required you to shorten your Days Sales Outstanding and average collection period? How would you accomplish this?

2. A working capital shortage can cause a growing company to go bankrupt despite lots of profitable sales.
Let's talk about the current liability side of our balance sheet. How would you go about getting vendors to sell to you without demanding COD or COO (cash on order) terms?

• How would you approach a banker for a working capital loan ?

Answer 1

1. To reduce the average collection period, one has to take some of the following measures:

• To provide cash discount to customers for early payment
• To have quality products and because of which customer would not go anywhere if you change your credit policy term
• To provide various payment options rather than just cash as everyone will be interested in making digital payments from there home.

2. Working capital shortage can cause company troubles for shorter time but it will never go for bankrupt unless they have strong financial base that is balance sheet.

3. One should develop a repo with vendor initially that he has confident on you to give the material on credit. Initially one should pay on time and cash on time. After a period we can demand for a higher credit period.

To approach banker for working capital loan, one should be submit to the bank a projection of cash flow and income statement for atleast 5 years. The projection should be realistics and achievable. Based on our projection and reputation of the Company, banker will process working capital loan.