Regional Textile Limited (RTL) purchases raw material from various vendors with an average payment period of 45 days. Most of the sales are on credit and average collection period is 50 days. There is a gap between the cash collection and payment as the management is unable to recover debts within 45 days.
Required:
What measures can be taken by RTL to reduce the above stated gap ?
SOLUTION:
RTL have to get/secure money from banks in terms of loan and have to pay to creditors on 45th day. When RTL recover it from debtors this will be used in settling in their loans, but there is additional cost incurring and that is interest. When we get loans from banks we have to pay the interest.
OR
RTL should negotiate with the vendors to enhance payment period as 50 days or above. Or
RTL should increase its sale volume to gain maximum profit and this profit should not distribute among shareholders and should cover the payment gap with vendors.
OR
Clear and Concise….
To reduce gap they should secure short term loans from the banks, which could be repaid when they receive the cash from debtors.
