An efficiently managed firm will have a lower debtor collection period and higher creditor payment period...

An efficiently managed firm will have a lower debtor collection period and higher creditor payment period than their competitors.(based on statement 8)

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Expert Solution

Debtor collection period means the average days it takes for the company to collect the money owed to its debtors.For example a debtor collection period of 30 days means that the company receives the payment from its debtors within 30 days from the date of the credit sale.

Hence it is always better to have a lower debtor collection as it indicates that the company is collecting payments faster which increases the companies liquidity and hence the company can be more efficiently managed if there is a constant cash inflow coming from debtors collection.However an extremely low debtors collection period may indicate that the companies credit terms are very strict so the customers might shift to competitors who have more lenient credit terms.

Creditors Payment period means the average time it takes for the company to settle its debts with its suppliers.Generally a higher figure is better.

A company which wants to maximize its cash flows will look to increase the Creditors payment period. But a very high creditors payment period may involve late fees, loss of goodwill,etc.

Conclusion : In general companies would be looking to lower its debtors collection period and increase its Creditors payment period.

ekkarill92 answered 1 year ago

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