Indo Inc buys in sand, gravel, cement powder and steel reinforcement. These raw materials cost about $30 million most years. Indo Inc has recently enjoyed a surge in sales after it liberalised its credit policies. The result of the change in credit policies was that the value of accounts receivable rose and management decided it must hold higher levels of raw material inventories.
As a result, Indo Inc has experienced something of a cash squeeze. The financial manager thinks a $500 000 commercial bill will give the entity time to sort out the increased accounts receivable problems. This finance will cost 7 per cent per annum. The sales manager comes up with another idea of slowing down creditor payments to average 45 days to match the increase in accounts receivable. Alternatively, Indo Inc has been in contact with a factoring company who has offered to take over a proportion of their accounts receivable at a rate of 80 per cent of the original accounts receivable balance (i.e. a 20 per cent discount).
What plan of action do you suggest for Indo Inc?
What are the advantages and disadvantages of each of the strategies that have been put forward?
