Bev’s Design Services Ltd. began operations approximately nine months ago. The company organizes the hall and table decorations for a variety of functions, including weddings, parties, and meetings. Bev’s Design has completed 15 contracts so far and, with wedding season coming up, has 20 more signed contracts. However, the company has no cash in its bank account and its sole shareholder, Bev McDowell, has had to lend the company money from her personal funds.
For each signed contract, the company requires a $50 non-refundable deposit. The balance of the account receivable is due three weeks following the function. All the decorations must be purchased about two months before the function or once the contract has been signed, whichever is earlier. The company pays for the decorations at the time of purchase. Recently, the company has learned that it can apply for an account, which will permit it to pay 30 days after purchase.
Instructions
Identify at least three ways that Bev’s Design Services Ltd. can improve its cash management practices, in particular with respect to accelerating the collection of its receivables and delaying the payment of its liabilities
Best practices for cash management in particular with respect to | |||||||||||
accelerating the collection of accounts receivables | |||||||||||
1) | Reduce the payment cycle | ||||||||||
Bev's design services ltd. should reduce the payment cycle of receiving balance amount | |||||||||||
from 3 weeks to 1 week.If possible the company may receive the entire amount 1 week | |||||||||||
before delivering services . | |||||||||||
2) | Discount on early payment | ||||||||||
The chances of receiving payment increases if DISCOUNT is offered.The company should | |||||||||||
offer cash discount to customers which will encourage early payment. | |||||||||||
3) | Using factoring services | ||||||||||
Using a factoring service is like selling your receivables to third company.The cost involved with this services can be justified by improving cash flow.The company may factor its accounts receivables and receive cash earlier. | |||||||||||
Best practices for cash management in particular with respect to | |||||||||||
Delaying payment of its liabilities | |||||||||||
1) | Negotiating Credit terms | ||||||||||
By negotiating credit terms with the supplier for payment at a later date,the company can defer its liabilities. | |||||||||||
The company shall apply for account which allows payment after 30 days from purchase. | |||||||||||
2) | Changing the mode of payment | ||||||||||
The company may choose to pay via payment modes which takes a longer time for processing. | |||||||||||
For example:instead of online transfer the company may make payment via cheque.(In online modes the | |||||||||||
amount gets paid instantly while a cheque some days for clearing. | |||||||||||
3) | Maintaining credit worthiness | ||||||||||
Maintaining credit worthiness with your creditors helps in purchasing goods on credit. Note Please hit the upvote button.Thanks |
Bev’s Design Services Ltd. began operations approximately nine months ago. The company organizes the hall and...
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