Working Capital Policies and Credit Sales Strategies
Alternative Investment Policies of Working Capital
- Conservative Policy: This policy alternative has high liquidity, and a large proportion of its capital is in current assets. This type of policy is risk-averse.
- Moderate Policy: This policy manages capital in a rational way. Its growth is higher than that of a conservative policy and has sustained growth over time.
- Aggressive Policy: Companies that implement these policies have low liquidity because they believe that it is unnecessary to have too much cash. Their main objective is to maximize profit. They have lots of inventory in storage.
When a Company Offers Cash Discounts to Customers
A business grants cash discounts when it wants to increase its sales and likewise have greater liquidity. Offering a cash discount encourages customers to demand more products.
Importance of Identifying Segments of the Investment Portfolio
It is necessary and important to determine the segments of the portfolio because there is a more diversified investment. In this case, we invest in securities where we have temporary surpluses and do so with the goal of reducing somewhat the effect on the company. By reducing cash and investing in different segments, we will have different alternatives:
- Available Cash: Investing in this segment would be highly liquid but have low performance because the ability to become effective immediately shows that it is not performing well.
- Controllable Cash: This segment is associated with the time when cash is needed. One can therefore invest in it, taking into account that we can get liquidity when needed.
- Free Cash: Investing in this segment for small companies is not advisable because we know that this investment is only short-term.
Importance of Determining the Optimal Order Quantity
It is important because it would lower storage costs and prevent having excess inventory, which can lead to losses. It is also much more important when orders are made on credit, as an inefficient order may incur unnecessary interest.
Basic Criteria for Determining a Credit Sales Policy
To determine a credit sales policy, we consider the 5 Cs. The five Cs of credit are general factors credit analysts often consider when making a decision to grant credit:
- Character: The commitment to meet credit obligations. Character can be measured through the history of payment of the person requesting the credit.
- Capacity: The power to meet credit obligations with current income. Capacity is evaluated by studying the income or cash flows in the income statement or cash flow statement of the applicant.
- Capital: The ability to meet credit obligations from existing assets, if necessary. Capital is evaluated by considering the net worth of the applicant.
- Collateral (security): The warranty can be recovered if no payment is made. The value of collateral depends on the cost of recovery and the potential value.