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Case study
Hugo is the manager of a medium-sized retailing operation and is concerned about the collection of monies for goods sold. He has a current policy for collecting monies from credit customers and all goods are sold on credit. He has actual sales data for the first six months of the financial year and projected sales figures for the six months to credit customers. He wishes to consider the impact of adjusting the policy and has two proposals in mind The policies are below:
Timing of payment
Payment under current policy
Projected payment under policy option 1
Projected payment under policy option 2
1st month after sale
60% of monies collected
80%
90%
2nd month after sale
25% of monies collected
12%
5%
3rd month after sale
14% of monies collected
7%
3%
4th month after sale
Sales figures
Actual for first six months predicted for next six months
July
$100,000
January
$120,000
August
$115,000
February
$125,000
September
March
October
April
November
May
December
$140,000
June
$110,000
There is one additional question Hugo wants answered: is there any advantage from a cashflow perspective of offering a two percent discount if accounts are settled in the first month", His view is that most of his customers would pay in the first month and the remaining would pay in the next month, and no bad debts would need to he written off.
1. Describe a budget development coordination and approval process
2. For what reasons might you adjust the lu-mat or methods of communication about budgets to employees?
3. Analyse the optional policies and make a recommendation to Hugo as to which policy he should consider as the better option. Include in your response a projected cashflow spreadsheet for each of the proposals
4. Provide feedback on Hugo's additional question.
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