Page 181 - DCOM505_WORKING_CAPITAL_MANAGEMENT

Working Capital Management

Notes manufacturers, who were cultivated by the competition by offering them attractive
discounts. In fact, the smaller manufacturers came to his company, only if, the market was
starved of the product. The Sales Manager pleaded for a more liberal credit policy which
would also help increase the sales volume. He ruled out the possibility of procuring
additional volume of business from the big customers who had already evolved a scheme
sharing out their business among the different suppliers. Any attempt to obtain more
business by offering discounts to the bigger firms, the sales manager argued, will only
lead to a retaliatory action by competitors and ultimately escalate into a price war which
will only prove disastrous for the company. On the other hand, granting credit to the
smaller customer will bring the company’s policy in line with competitors and will actually
stimulate growth in the consuming industry with beneficial effects to the company.
Dr. Bhatt obviously undecided about the wisdom of extending credit to the smaller
customers to boost sales volume, called for a detailed note from both the Sales Manager
and the Credit Manager. He, However, pointed out that any such change of credit policy,
even if approved, would bring in results only in long run while there was an immediate
need to boost sales. The Sales Manager, at this point, conveyed to Dr. Bhatt, an offer he had
just received from the Shoe Manager. An offer he had just received from the Shoe Plast
Limited, one of the larger public limited company. The controller referred to the substantial
investment in receivables that this transaction would entail and reckoning interest at 18
percent per annum which was the rate the company was paying to its bankers; he argued
that this transaction would involve an interest burden of ` 1,64,250 whereas the profits
from the transaction would only be ` 90,000. As such the offer was wholly unattractive.
Shoe Plast Limited would pay for these additional supplies to be effected in the next three
months, in the seventh month from date. It was, however, unwilling to pay an interest on
the extended credit term. The Sales Manager pointed out that Shoe Plast Limited ranked
high in the ratings by the Credit Department and therefore, there should be no hesitation
in accepting this offer for additional business.

The customer company wads carrying out an expansion scheme at that time using partly
its current resources to finance the same and was, therefore, finding itself in a difficult
liquid situation. It, however, expected this to be only temporary and anticipated that the
position would improve considerably after six months. Shoe Plast Limited had made an
offer to take 100 MT additional each month in the next three months over and above the
regular offtake, if Plastic Products Limited agreed to give special credit terms. The Credit
Manager, intervening at this stage, pointed to the high rate of mortality among the smaller
firms. He read out a long list of the smaller firms in the industry which had closed their
creditors in the last few years. He points out with pride the excellent record of the company
in the matter of credit management and to the fact that the company has had no incidence
of bad debts in the last smaller manufacturers. He further argued that the company would
be taking grave risk if it chose to adopt such a policy, as it would lead to bad debts. About
6 per cent each year, which he was quick to point out, was about the profit margin company
appears to have from its products.
Questions

1. What consideration he should take into account, while revising the credit policy of
a company?
2. Advice Dr. Bhatt how he should deal with the circumstances.

3. Define factoring. Briefly discuss the services provided by a factor.
4. What are the various types of factoring?

Contd...

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