A Switch in Time Saves Nine

Simon sat at his office desk pondering over what was discussed at his last meeting with the Treasurer, Angela Krampf. The working capital of their firm, Progressive Farm Equipment Incorporated, had increased at an alarming rate over the past couple of years making the directors and top managers very concerned. Despite the implementation of a “jut in time” inventory system and more efficient cash management methods, the working capital continued to rise. This time, however, it was the accounts receivable that needed attention. Angela received a memo form the board asking her to review and rectify the credit management problem as soon as possible. One of the sentences in the memo read “…we simply cannot continue to carry our customers as long as we have been.” Angela had therefore called on her assistant, Simon Martinez, and briefed of the situation.

Progressive Farm Equipment Inc. had been in business since 1945, producing small and medium sized tractors, tillers, and other firm equipment. Its customer base included various local and regional hardware stores, farm equipment stores, and repair shops. Most of the clients were strapped for cash and were accustomed to fairly flexible credit terms. The firm had been hard pressed to offer terms of net 60 to its clients, primarily to counter competition from national suppliers and to maintain good customer relationships.

Sales had steadily increased over the years but over the past year, higher interest rates and a weakening economy had caused a slump in the agricultural sector leading to a drop in sales of farm equipment. Moreover, the number of farmers filing for bankruptcy had been increasing at an alarming rate.

As Angela and Simon reviewed the accounting statements (see Tables 1 and 2) and the aging schedule of receivables, they realized that despite the fairly liberal credit