WQZ Co – Receivables Management

Receivables management

WQZ Co could introduce an early settlement discount of 1% for customers who pay within 30 days and at the same time, through improved operational procedures, maintain a maximum average payment period of 60 days for credit customers who do not take the discount. It is expected that 25% of credit customers will take the discount if it were offered.
It is expected that administration and operating cost savings of $753,000 per year will be made after improvingoperational procedures and introducing the early settlement discount.
Credit sales of WQZ Co are currently $87.6 million per year and trade receivables are currently $18 million. Credit sales are not expected to change as a result of the changes in receivables management. The company has a cost of short-term finance of 5.5% per year.

(c) Discuss the factors that should be considered in formulating working capital policy on the management of trade receivables. (8 marks)

Answer:
—Analysis of Credit
Finding a credit to be offered to customers involves finding a balance between enticing customers, which comes at a cost to the business, and refusing opportunities to make sales.
Creditworthiness is an important area to consider. The risk of a customer defaulting must be balanced against the profitability of sales to the customer. There are a few ways of assessing the creditworthiness of customers including, new customers should provide 2 references; bank reference and trade reference. Published information from published accounts and other sources such as credit rating agencies should be considered. Besides that, previous experience of customer should also be taken into account. Companies can also devise their own credit rating system, however this would highly depend on having good quality information
to make sound creditworthiness decisions.

—-Credit Control Policy
Customer payment records and aged receivables analysis should be reviewed regularly to see if customers are acting within the agreed credit terms.Regular contact with customers either via statements, emails or telephone calls is crucial to ensure they are aware of the debt and to find out the payment date.For business who have experienced customer defaulting due to financial difficulties, it is important for them to be regularly in contact with those customers to
assess the going concern issues and work out whether extended credit terms would be beneficial.

—-Collecting Debts Owing
The overall debt collection policy should be that the cost of collecting the debts do no exceed the benefit of the debt collection. Procedures to pursue overdue debt must be established and followed by credit control staffs to ensure collection is done accordingly. Initiating legal proceedings or the use of debt collection agencies should be considered as a last resort as it could antagonise customers and could end important trade relationships.

Will this answer be acceptable to earn the whole 8 marks John? As I saw the answers provided was more specific. Thanks in advance!