Question

1. How does credit policy affect the CCC?

2. How can cash discounts be used to influence sales volume and the DSO?

Answer 1

1. Impact of credit policy on CCC:

Cash conversion cycle is used as a metric in measuring how long a firm will be deprived of cash if it increases the investment in inventory in order to expand its customer sales. It can measure the risk of liquidity that is entailed by growth. In short CCC is the time span between a firm’s disbursing & collecting cash.

The main objective of CCC & its computation is to have a change in the policies relating to credit purchase & credit sales. The standard of payment on credit purchases or receipts from the debtors can be changed on the basis of CCC reports. If in case of good liquidity position the existing policies can be continued. Its purpose is also to study the cash flow of the business. The CCC readings of the company can also be compared with other company’s readings to know the quality of cash management in the company.

2. Discounts are defined as reduction in price in case of early payment. The discount specifies the percentage reduction & how the payment must be made to be eligible for the discount. The benefit of discount is that it reduces the price which would automatically increase the sales. This is because as the result of discount the price of the good or service would be less when compared to others which automatically influence everyone to buy the company’s product.

In other words, cash discount attracts new customers who consider the discount to be a price reduction and some existing customers will pay more promptly in order to get the discount