Question

ABC Corporation is a recently formed business selling the “World's Best Doormat.” The corporation is selling doormats faster than ABC can make them. It has been selling the product on a credit basis, telling customers to “pay when they can.” Oddly, even though sales are tremendous, the company is having trouble paying its bills.

Discuss (a) What steps should be taken to improve the company's ability to pay its bills? (b) If the corporation is still unable to pay its bills, what additional steps can be taken with its receivables to ease its liquidity problems?

Answer 1

a)

• Corporation should try to negotiate longer payment terms with their vendors.
• Corporation can make purchases in bulk to get some discounts and rebates from vendors.
• Corporation should dispose off all its unproductive assets to generate cash to manage operations.
• Corporation should analyse their prodution costs and try to reduce the unnecessary costs and expenses.
• Corporation can offers and discounts on making prompt payments by customers

b)If corporation is still unable to pay its bills, then followings steps may be considered:

• Corporation should analyse its policy of "pay when they can" as it is creating difficulties for the corporation.
• Corporation should make all the necessary changes in its policy.
• Corporation may fix limit of time in which payment can be made.
• Corporation should send reminders to all the receivables and offer them discounts on making payments instantly.