Question 55

Look for slow paying accounts with large balances and investigate the cause.

The most effective response for the manager is to look for slow paying accounts with large balances and investigate the cause. This approach allows for identifying specific issues that may be contributing to the extended collection period, enabling targeted solutions.

A) Look for slow paying accounts with large balances and investigate the cause.

This option is correct as it directly addresses the issue of the increased average collection period. By investigating slow-paying accounts, the manager can understand whether there are underlying issues such as customer dissatisfaction, cash flow problems, or ineffective billing practices that need to be resolved.

B) Implement a “cash only” policy for commercial customers.

While implementing a “cash only” policy might improve cash flow in the short term, it could alienate customers who prefer credit terms. This could lead to a loss of business and does not address the root cause of the collection period problem, making it an ineffective solution.

C) Reduce prices to ensure that products are more affordable to customers.

Reducing prices may attract new customers or increase sales volume, but it does not directly address the slow collection of payments from existing customers. This option fails to tackle the core issue of delayed payments and could negatively impact profitability.

D) Reduce the firm’s dependence on accelerated collections.

This option suggests that the firm should become less reliant on fast collections, which could be counterproductive. By accepting slower collections, the firm risks further exacerbating cash flow issues rather than actively working to resolve them. This does not provide a proactive solution to the problem at hand.

Conclusion

Investigating slow-paying accounts is essential in understanding the factors contributing to the increased collection period. All other options either fail to address the issue directly or could lead to negative consequences for the business. By focusing on the accounts receivable situation, the manager can implement more effective strategies to improve cash flow and reduce the collection period.