The directors of Woebun Standard Components plc have been very successful in persuading their customers to pay, on average, in one month. However, they believe that this policy is restricting sales and that sales would increase by 15 per cent if the average collection period for receivables was allowed to increase from one month to two months.

The selling price of the component is £40 per unit and variable costs per unit are £30. Annual sales revenue is £6m. A sales increase of 15 per cent would lead to an increase in inventory of

£400,000 and an increase in trade payables of £100,000.

Woebun expects a ROCE of 27 per cent per annum.

a On purely financial grounds, should the company allow its customers to enjoy the extended credit period of two months?

b Assess the practicability and financial viability of restricting the two months’ credit to new customers only.

c What are the main causes and symptoms of overtrading? To what extent and in what ways can effective management of debtors avoid the problems of overtrading?