Jill Land, president of Loon. Co., is happy to report to the company\'s stockhol

Question

Jill Land, president of Loon. Co., is happy to report to the company's stockholders that the company increased its cash position by 20% from last year. Its average collection period decreased by 12 days. Jill knows some customers are unhappy about the new credit terms but believes that you cannot please everyone; that's part of business. Do you think Loon Co. is on the right track? One shareholder is quite upset to learn that the company is holding so much cash. Do you agree with the company's belief that increasing the cash position by 20% is sound? You make the call. Be sure to justify your answer!

Explanation / Answer

It is always good to reduce average collection period as it signifies that the company fund is not stuck in account receivables. But the decision to reduce average collection period need to be taken in a way that ensures that company sales are not reduced as impact. If it impact sales then it will impact shareholder value negatively.

As per the details given in the question, 1) it seems that customer is not happy so it can result in reduced sales. 2) Shareholders are not happy which means that the company does not have alternative use of cash. Both of this will hurt the company in terms of reduced profitability and reduced shareholder value.

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