Question

7. Explain how a company could: (a) avoid a backlog of orders when sales exceed expectations; (b) avoid product defects on new products; (c) offer more credit to its customers when it already has a bad debt problem; (d) improve its credit rating with suppliers after paying some late; (e) lower its cost of financing when the market interest rate has increased.

Answer 1

Explain how a company could: (a) avoid a backlog of orders when sales exceed expectations; (b) avoid product defects on new products; (c) offer more credit to its customers when it already has a bad debt problem; (d) improve its credit rating with suppliers after paying some late; (e) lower its cost of financing when the market interest rate has increased.

1.how a company could: (a) avoid a backlog of orders when sales exceed expectations

a. First & foremost,have a frank meeting with your workers & explore the possibility of their willingness to work over-time ,also promising over-time or bonus pay to workers, so as to clear the backlog.This will also make the workers feel important & respected, in considering their views & participative management.

b. Procure from other manufacturers , by way of tie-up for an agreed percentage with the latter, so as to clear the backlog-- so that the cutomer is satisfied , at extra cost (parting away of some sale value to that other manufacturer)& retained, without losing him.

2.how a company could: avoid product defects on new products

a. Take adequate extra-care to the last detail, even if the production is to progress slowly, employing inspection at every possible stage , till ,completely satisfied about the quality of output.

b. employ professionals who are diligent & strict in adhering to decent standards.

c. Test-check the output, with known peers , who can certify to the quality of the product, before releasing in the market.

d. Compare with competitor-product's features to see all that is available in the former ,are also taken care of , in your own new product, about to be brought into the market.

3.how a company could:(c) offer more credit to its customers when it already has a bad debt problem

a.More credit can be offered to a select few who have been meeting the time schedule, instead of offering on a blanket basis-- need not be withdrawn altogether, but be selective(not to all) ,in deciding the customers--can be discrete about that , else may result in loss of other customers & their patronage.

b.Offer the defauting customers , more of cash discounts for the current receivables & also some generous discounts , for the older ones , to lur them into turning the already -gone- bad debts into realised ones.

4.how a company could:(d) improve its credit rating with suppliers after paying some late

a. Can be more punctual , henceforth,particularly , with those , whose payments were delayed.Can prove with solid action ,rather than with words.

b.Making a constant endeavour to meet all vendor bills , within stipulated dates, creating an atmosphere of being trust-worthy .Things will change ,amongst industry peers , within a short span of time.

5..how a company could:(e) lower its cost of financing when the market interest rate has increased

a. Increased interest rates increases the after-tax cost of debt to the company , which also increases the overall cost of financing for the company , ie.weighted average cost of all forms of financing.So.the company has to switch to comparatively lower cost-bearing forms of financing, OR

b. interchange the components of the capital structure ,if really possible, in such a way that the overall WACC reduces--- this in reality , is better said than doen--as equity capital is always more costlier than debt --due to their ownership feature.

c. the company can consider adding preference capital--after working out the WACC with their costs.

d. reduce debt ,in the capital structure, ie. Repay, if that is possible..