improving efficiency financial ratios

[amina_98]

Justify two strategies that financial managers can implement that will improve the accounts receivable ratio of a business (sales/accounts receivable) that is extremely low?
This question is worth 4 marks.
I have 2 strategies but im not exactly sure if listing them will get me the 4 marks. im not sure what i have to elaborate on.
this is my answer:

1. reducing the time frame a customer is given to pay a bill (30 days)
2. putting policies in place for collecting bad debts, such as using a debt collection
agency.

[Essej]

Justify two strategies that financial managers can implement that will improve the accounts receivable ratio of a business (sales/accounts receivable) that is extremely low?
This question is worth 4 marks.
I have 2 strategies but im not exactly sure if listing them will get me the 4 marks. im not sure what i have to elaborate on.
this is my answer:

1. reducing the time frame a customer is given to pay a bill (30 days)
2. putting policies in place for collecting bad debts, such as using a debt collection
agency.

Hi again!

You're right on track with your answers, i would definitely have something similar - except, for number 1) consider using discounts for early payments instead! I think it shows more diversity as the two points are fairly interrelated.

Correct me if i'm wrong, but isn't a low accounts receivable ratio a good thing? meaning it takes less time to collect debts? Or maybe i'm thinking of the 365/x you incorporate after sales/accounts receivable.

So in this question, you've now automatically got 2 marks for listing the efficiency financial strategies, however the question is asking you to justify why these specific strategies are applicable (sometimes you may get a case study and it is easier, other times you may need to generalise).

For 1) you could say discounts for early payments encourage faster debt repayments as debtors are able to repay loans at a lower cost than previously accessible. Thus in order to reduce the respective loss in profits for the debtor it is desirable to take advantage of this discount, ultimately contributing to an improvement in efficiency.

For 2) You may use Bad debt collection policies encourage faster payments of accounts receivable through the threat of agencies that seek out the debt. If it is unpaid by the stipulated period, the debtors may experience a deterioration in their credit rating which could inhibit future prospects of receiving loans. To avoid these consequences the debtors are likely to repay accounts within the stipulated period and therefore improve efficiency in debt collection.

Hope this helps!

[amina_98]

Hi again!

You're right on track with your answers, i would definitely have something similar - except, for number 1) consider using discounts for early payments instead! I think it shows more diversity as the two points are fairly interrelated.

Correct me if i'm wrong, but isn't a low accounts receivable ratio a good thing? meaning it takes less time to collect debts? Or maybe i'm thinking of the 365/x you incorporate after sales/accounts receivable.

So in this question, you've now automatically got 2 marks for listing the efficiency financial strategies, however the question is asking you to justify why these specific strategies are applicable (sometimes you may get a case study and it is easier, other times you may need to generalise).

For 1) you could say discounts for early payments encourage faster debt repayments as debtors are able to repay loans at a lower cost than previously accessible. Thus in order to reduce the respective loss in profits for the debtor it is desirable to take advantage of this discount, ultimately contributing to an improvement in efficiency.

For 2) You may use Bad debt collection policies encourage faster payments of accounts receivable through the threat of agencies that seek out the debt. If it is unpaid by the stipulated period, the debtors may experience a deterioration in their credit rating which could inhibit future prospects of receiving loans. To avoid these consequences the debtors are likely to repay accounts within the stipulated period and therefore improve efficiency in debt collection.

Hope this helps!

Once again your advice was very helpful
Thank you so much.