Jackie Ledbetter started a business, Jackie's Designs Inc., after finishing her interior design courses eight months ago. Jackie has been fortunate in that the company has already completed six contracts, has four more signed contracts, and has booked three meetings with prospective customers. The prospective customers are referrals from the six contracts she has already completed.
Jackie is having difficulty understanding why her business has no cash in the bank since it has been so successful. You asked her to explain the terms of the contracts and her system for purchases.
A contract is signed once the customer and Jackie agree on the work to be done. There is no deposit on signing the contract. The contract price is a flat fee for Jackie's work and cost plus a percentage for all items purchased by the company. The fee for Jackie's work is due once the contract is completed.
The amount for items purchased by the company is due three weeks after the items are delivered to the customer, in case the customer wants to return them. To date, an average contract takes four months to complete. The company does not have a formalized system for purchases. If a customer agrees that they would like to purchase certain items, Jackie will purchase the items when she finds them. Generally, she uses cash to pay for the items at the time of purchase. The items are then delivered to the customer within a week.
Instructions
Identify ways the company can improve its cash management practices, in particular with respect to accelerating the collection of its receivables and delaying the payment of its liabilities.