SITUATION
Ruston Manufacturing Company is a small firm selling entirely on a credit basis. It has experienced successful operation and earned modest profits. Sales are made on the basis of net payment in 30 days. Collections from customers run approximately 70 percent in 30 days, 20 percent in 60 days, 7 percent in 90 days, and 3 percent bad debts. The owner has considered the possibility of offering a cash discount for early payment. However, the practice seems costly and possibly unnecessary. As the owner puts it, "Why should I bribe customers to pay what they legally owe?"
Question 1 Is offering a cash discount the equivalent of a bribe?
Question 2 How would a cash discount policy relate to bad debts?
Question 3 What cash discount policy, if any, would you recommend?
Question 4 What other approaches might be used to improve cash flows from receivables?