Question

You are the controller for a medium size company in the Seattle area. Your company's sales last year were $10,000,000. The Accounts Receivable balance was $2,000,000 at year- end. This year sales are expected to be down by $1,000,000 as a result of an economic downturn. It is reported that some of your customers are experiencing cash flow problems due to the downturn. Requirement one (1) 1. Answer and discuss these questions: Identify and describe potential accounts receivable problems that your company may encounter because of the economic downturn. Identify and describe steps that your company could take to avoid these future problems. Identify opportunities that your company may have in view of the downturn. Describe the affects that any steps you take would have on sales and net profit.

Answer 1

Accounts Receivable problems include -

1. Slow Payment or non Payment of balances by debtors.
2. Delay in Payments
3. Increased exposure, the credit asked could go over the approved limits, due to downturn, they seek more time and continue to do business on credit.
4. Bad Debts or stale accounts
5. Discounts could be demanded
6. Increased financing cost for the company and increased need for working capital liquidity for the company.

Steps to avoid this problem

1. Focus on collection, timely gentle reminders, subtle follow ups, incentivise early receipts. Announce discounts for early payments
2. Track the "Promise to pay" dates and do not continue giving higher credits to such clients.
3. Revise credit terms due to downturn, study the industry and competitors, check their policies and have attractive terms than them because you might not wanna lose your clients.
4. Factoring, sell your receivables at some discount and liquidate your money that is stuck.
5. Cash discounts and other price benefits for advance payments and Cash on Delivery.
6. Bills receivable could be relied on as an instrument.

Opportunities: The credit sales don't seem to be bothering the company since only 20% of sales is stuck in credit. Company should adopt better discount models for these clients who agree to pay in advance or cash discounting for cash on delivery clients. This would encourage customers to use this modes and save money for themselves. Try and leverage working capital requirements to ensure liquidity and continue to provide credit to some big customers.

With cash discounts and other factoring or bill discount related activities the Net profit shall reduce because there is an additional cost to the previous sales. But with such discounts overall revenue is expected to increase. The loss is only in terms of percentage terms as a matter of volume or value, higher sales could help achieve better profits, challenege would still remain about profitability.