Question

Write short essay-type responses to the following questions. Make sure that you are able to explain in your own words. Do not use bullet points. For any calculation, show the steps briefly.

ABC Wholesale Limited is a leading supplier of bulk foods to restaurants, bars, and bakeries in Wellington. It offers a standard trade finance facility to its customers, with the following conditions specified 0.5/14, n/28.

(a) Explain the pros and cons of providing trade credit from ABC Wholesale Limited’s perspective. And explain the opportunity cost of not utilising the trade credit from the customers’ perspective

(b) Some customers of ABC Wholesale Limited did not pay their invoices in a timely manner. These outstanding payments have been recorded as accounts receivables. What are the possible ways that ABC Wholesale Limited can turn these accounts receivables into cash to support the business’s daily operation? Briefly explain how each method works.

Answer 1

A. Providing trade credit

0.5/14 , n/28 means the payment terms standard means no payment and 0 5% discount for payment upto 14 days.

Advantages of providing credit

1. Promotes early payment

2. Improves liquidity

3. Receipt of the cash on time can help in reinvesting in bonds or in the business

The trade off being that , the late receipt of cash is offset by the discount offered. So the company has the weigh the options and see if it would be worth offering discount for improving the working capital positions.

B.

How can collectibles improve

With the debtors being pending for more than a few months, the company would have to start charging a cost to the defaulting debtors as well.

With the increased cost being an added motivation, it might improve the collectibles.