Changes in a firm's collection policy can affect sales, working capital, and profits.

Question

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A firm's collection policy affects its cash inflows, which in turn affects its working capital and profits. If the collection policy is too lenient, sales may increase initially, but it may lead to a higher level of bad debts and lower profits in the long run. On the other hand, if the collection policy is too strict, it may negatively impact sales as customers may choose to purchase from competitors with more flexible payment terms. Therefore, changing a firm's collection policy can have a significant impact on its financial performance.

Changes in a Firm's Collection Policy Can Affect Sales, Working