Question

20. Offering cash discounts as part of trade credit are not a strong incentive for customers to pay their bill quickly.

a. True

b. False

Answer 1

Due to competitive pressures, many a times, firms resort to offering credit period to lure customers. However, this increases the receivable cycle and the bad debt costs .

Offering cash discount is a way to incentivise customers to pay early and the firms can avoid the ill-effects as above. Further, the customers can reduce their cashoutflow by the discount amount by paying early.

However, the no. of customers opting will depend upon the quantum of discount vis-a-vis the credit period offered,

So, the statement is false (b)