Q. Introduction of just-in-time inventory management?

It has already been observe that a reduction in inventory due to the introduction of just-in-time inventory management can improve liquidity by improving cash flows and reducing any cash deficit. The same principle is able to be applied to other types of working capital.

Some of the similar arguments also apply however in that while liquidity may be improved there could be offsetting disadvantages in terms of lost profitability or increased risk.

Receivables.

Giving two months' credit makes a important level of receivables that needs financing.

In stable state of sales of $33000 per month then receivables will be

One month's credit                 ($33000 × 90% × 50% × 0·975)                     14479

Two months' credit                 ($33000 × 90% × 50% × 2m)                         29700

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Total receivables                                                                                             44,179

This is a major proportion of the maximum financing requirement.

Whether the credit terms themselves is able to be changed may depend upon the credit terms of competitors when set alongside the other conditions of sale. If the business is unequal with competitors then lost sales may result and a balance between liquidity and profitability may need to be struck.

In terms of debt collection it would seems that all receivables are expected to pay on time so there is little that can be done in this area given the current credit terms. Accelerated payment could be optimistic by a higher cash discount but this is expensive particularly as customers who would pay within one month anyway would also receive a greater reduction in price without any benefit to the business.

Invoice discounting as well as debt factoring may be alternatives but these are expensive and in the particular circumstances of the business where there are expected to be no late payers or bad debts it might seem inappropriate to use outside assistance.