Borboleta is considering a change to its credit policy as it attempts to help its customers through its supply finance scheme. This will result in an increase in its debtor collection period from one month to two months. This relaxation of credit terms should give rise to an increase in sales in each year amounting to 3% of the current sales volume.
Sale Price Per Unit £20.00
Marginal Cost Per Unit £17.00
Current Sales Per Annum £4.8million
The company requires a twenty per cent return on investment.
The Management Accountant has estimated that the 25% increase in sales would result in additional stocks of £200.000 and additional creditors of £40.000
Question-
Advise the company on whether or not to extend the credit period offered to customers if
a) All customers take the longer credit of two months.
b) Existing customers do not change their payment habits, and only the new customers take a full two months credit.
c) How is supply chain finance altering the traditional role of working capital management and critically evaluate how a negative interest rate policy affects a firm's opportunity cost of capital.