Anita Khan sells lawn and garden products in bulk to companies that do lawn and garden work. She extends credit to her customers for 60 days, but she is worried about cash flow problems. But this is a highly competitive business and most of her competitors also offer credit-some of them for up to 90 days. Anita is also concerned with the cost of billing and collecting money from her customers, some of whom make it a habit of paying late. Which of the following is the most useful advice to Anita?
A) Anita can reduce her cash flow issues by extending credit for 90 days.
B) Anita would be able to generate more sales and reduce her collection costs by cutting the credit period to 30 days.
C) Anita should consider selling her receivables to a factor, thus allowing her to receive cash more quickly and eliminate the hassles associated with collections.
D) Anita should consider a "cash only" policy and eliminate credit sales. This would eliminate her cash flow problems and free up money and other resources that she now devotes to collecting past-due accounts.

Question

Quizplus · Accepted Answer

Selling her receivables to a factor would allow Anita to receive cash more quickly and eliminate the hassles associated with collections. This would help her address her cash flow problems without having to extend credit for longer periods or eliminate credit sales altogether. Cutting the credit period to 30 days might reduce collection costs, but it could also reduce sales if her competitors offer longer credit periods. A "cash only" policy would eliminate cash flow problems but could also reduce sales as some customers may prefer to buy from competitors offering credit.

Anita Khan Sells Lawn and Garden Products in Bulk to Companies