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

Increaseing the cash position by 20% by a company , when heard first time sounds a very great achievement. But it also shows that the company does not have any profitable opportunity to invest its cash resources into the business. It also appears that the company is following strict credit terms with the customers as is evident by reduction of average collection period by 12 days. Jill should ensure that this will not lead to increase in the number of unsatified customers which will have a long term impact on the business of the company.

Keeping cash asset idle is not a very sound decision. Instead the company may distribute the excess cash to the shareholders whereby the company can help the cash to be invested / used by them efficiently. Increasign the shreholder wealth being the final goal of any company, this will also lead to a better pricing of the share in the market and the valuation of the company will also goup.

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