Question

You own a small business that produces high quality cut flowers. While you have many customers your largest buyer is Blooming Smart Ltd, a large retail outfit with a national chain of outlets that accounts for 50% of your orders on average. Blooming Smart Ltd has now requested that you extend credit terms to them better than what you offer to your other buyers.   

1. How could this affect your operating cycle?
2. Do you see anything ethically wrong with what Blooming Smart is trying to do?
3. What would be your strategy(ies) in dealing with this?

Answer 1

A. The extension of credit terms to Blooming Smart Ltd means that they will be making the payment after the other customers have paid. Since Blooming Smart accounts for 50 percent of the orders, so this will lead to receipt of 50% payment on time and the remaining 50% will be received later. Thus, there will be delay in the operating cycle as if we don't get the money on time, we will not be able to meet our expenses.

B. Yes. I feel that Blooming Smart is trying to take an undue advantage of the fact that it is the largest customer and accounts for 50% of the sales. This is unethical.

C. Strategy to deal with this is that we need to increase our customer base and find some more customers who will be able to buy in large quantities. Moreover, the delivery of the flowers to Blooming Smart Ltd can be linked up to the payment. As soon as the payment is received, the flowers will be delivered and vice versa.