A Research Report On The Economy Of A Relaxed Asset Usage Policy

1451 WordsApr 6, 20176 Pages
a. It could be assumed from the identified ratios that RR is operating in a relaxed asset usage policy. This is due to a lower than industry average in the current, quick, turnover of cash and securities, and inventory turnover, while the DSO identifies a slower collection. b. RR is below the industry average, which can identify that they are less profitable. Due to the less profitable nature of RR, it could be assumed that they have more excessive working capital. According to Borad (2017) companies having relaxed working capital policies assume an advantage of almost no risk or low risk...(while) on the other hand, there is a disadvantage of lower return on investment because higher investment in the current assets attracts…show more content…
With excess inventory, it could lead to potential problems with the quality of the product. e. If the company reduces its inventory in the short run, cash will increase as the purchases of inventory will decrease. In the long run, the company may make changes that would reduce their cash holdings. f. The company’s DSO is documented at 45.63 days, where the industry average is at 32.00 days. This identifies that the customers aren’t paying their accounts as promptly as those shopping at other industry companies. RR could consider tightening their DSO policy. The four variables that make up a firm’s credit policy include: i. Credit period. The credit period identifies how long a customer has to pay. RR can reduce its credit policy to a shorter time (thus affecting the DSO), however, this can potentially discourage sales. ii. Cash discounts. Gives customers a potential discount for paying in cash before the end of the stated discount period. By implementing a similar policy, it could attract new customers and could also potentially reduce the DSO. iii. Credit standards. This identifies the credit given to customers. This can boost RR sales, but could also be a negative by increasing bad debts in the firm. iv. Collection policy. By implementing a tougher collection policy it will decrease the DSO, but could also affect the relationship with the customers. g. Yes, RR does face risk if it tightens its

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