Management of net working capital

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Alta Ltd., which sells computers, had the following receivables and payables: cash sales of 50 percent; credit sales of 50 percent with terms of payment 15-20 days after sales; inventory purchase all in credit with terms 2/10, net 30 (total payables for 30 days gets a discount of 2 percent in case of payment within 10 days); and the profit margin is 40 percent (5 sales 2 cost of goods sold). Currently, with new competitors entering the market the sales declined by 20 percent. Alta's CEO argues that it needs to easy its credit terms, offering to reduce cash sales to 30 percent from 50 percent, and increase receivables due up to 55-60 days. The manager assumes this will increase sales by 30 percent. Alta's CFO does not agree. Her argument is that increasing receivables due date will cause problems in cash collection and Alta may incur a loss with bad debts. Analyze the management of net working capital and advise the CEO and CFO.

Reference no: EM132419814

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