CASE: Stanley Products Credit Policy SP has somethin yrar Based on advance orders and the unusually larpe number of product inquiries, Stanlry belinyes that sales will increase by over Torecasts Tatter Stanleys scentC Side because they imply that ses recoghize the ecnncal superioricy of a regional reputation, and sales reached nearl .million in the most recent fiscal percent next year (1997 and will more than double in three years. These exlermal inaniig, and Slaniry is unsure how brst to raise any needed tunds, especially since his ability In supply capital is quite limited. BANK FINANCING No formal request has been made, but conversations with Tina McC ellan, a loan offlcer, Indicate that the baweyer, that Se might not be able to phtain any Igan watsgever. The main prmb ems. McClellan explained, are the soft eunomy and regulators who are forcing banks to be stricter. Tighter credit standards are simply an inevitable consequence of all this, with the result that a sort of two-tlered loan more creditworthy, they get the loans. And they get a reasonable rate brcause they generate transaction revenue well awer five figures per year. Small businesses, like SP, are the second tier. Lenders will require en reater loan d gher rates. And n a ed and supgested ** nley to ma very well justifie requ hr shnp around and Innk al nther banks OTHER OPTIONS 1.Ps up trade disunts and us upleswith the longest pay priod. Ms of SP's purveyors offer 2/10, net 30. That is, SP recelves a 2 percent cash dis count If it pays within 10 days and Is allowed 30 days 2/10, 45. Stanlgw nuld otenurse be rreful not to take en lona to nar as to podanucr his credit standing 2.Offer more ent cing cred it terms in order to shorten the frm's average collec- tion perlod. SP currently 3Jimit ernwth tn what can be internally financed. 4.Take in a partner. Taing in a partner represe ng option. 3aley beltwla, With some assurne managerial resporsibilitins. Such a person properly sele cled would al low Stanley to ronoentrale on the technical side of the company that enjoys so much. thi Thik u K ini rk t, aidi L il rad True, no single one of these minibanks provides much financing, but put them all together and I bet you'll end up with a sizeable amount, especially if you can locate more suppliers willing to let you take 45 days more cash fur vuu. And Rotherls has a su ulion tarcirus SP did.dd . to l olam firm's bad debt expense, which Is 1.3 percent of sales. thes STANLEY'S REACTION After some thought he decides to consider altering SP's cred t terms from net 30 to 3/10, 30: that is, he he 3 percent alscount uto ays, and 30 0ays ha edt standards. Stanley believes that 50 percent of sales will involve the 3 percent discount, and these buyers will take the full 10 days to pay. He also thinks that 30 percent of the sales will be paid on day 30 and 10 late on day 50. Further, bad debt expense, including collection costs, is predicted to be 0.7 The proposed changes in SP's credit terms and standards should affect sales in two ways. On one hand, esult in sP si supe cuslurrers Slanle dils an incueof5 ercentin sales (tiate: The forasts in Exhibit 2 are based on the existing credit policy) Variable cost i les. The percent of sales method can be used determine inventory reguirements, and the appropriate after-tax cost of capital required return) is 12 percent for any funds ted up in receivables and inventory. Plant and equipment neecls will remain editted to remain at 75 perrent o the relatvely modest seles clellee H nnlices th Changes. As Stanley questions to answer: Is it a good idea to alter the terms of credit? Is it a good idea to tighten credit standarcs? For the time being, he decides evaluate them together but thinks it makes more sense to discqunt, While 5P's prenl crrdil lerms are more tynical of what rprs on in the industrv. cash discoun are not unheard of. Stanley realizes that his sales projections implicitly assume little reaction from SP's competitors, which he thinks is "very likely but not certain. In any event, Stanley doesn't expect any widespread reaction and believes that in the worst case there ls e no change in predicted sales. ill QUESTIONS 1.Evaluate Roberts's assertion that "it's clear you need to stiffen credit standards since your bad clebt percenta *mquite) high for a lirm in your ine ef business."You may assuTie far the sake cf argument t 's bad debt percentage gh. 3. a). Estimate SP's days sales outstandin, that is, its average collection period (ACP), assuming the made. ord b) Complete Fxhihit Ic). Complete Exhibit 4 CASE: Stanley Products Credit Policy SP has somethin yrar Based on advance orders and the unusually larpe number of product inquiries, Stanlry belinyes that sales will increase by over Torecasts Tatter Stanleys scentC Side because they imply that ses recoghize the ecnncal superioricy of a regional reputation, and sales reached nearl .million in the most recent fiscal percent next year (1997 and will more than double in three years. These exlermal inaniig, and Slaniry is unsure how brst to raise any needed tunds, especially since his ability In supply capital is quite limited. BANK FINANCING No formal request has been made, but conversations with Tina McC ellan, a loan offlcer, Indicate that the baweyer, that Se might not be able to phtain any Igan watsgever. The main prmb ems. McClellan explained, are the soft eunomy and regulators who are forcing banks to be stricter. Tighter credit standards are simply an inevitable consequence of all this, with the result that a sort of two-tlered loan more creditworthy, they get the loans. And they get a reasonable rate brcause they generate transaction revenue well awer five figures per year. Small businesses, like SP, are the second tier. Lenders will require en reater loan d gher rates. And n a ed and supgested ** nley to ma very well justifie requ hr shnp around and Innk al nther banks OTHER OPTIONS 1.Ps up trade disunts and us upleswith the longest pay priod. Ms of SP's purveyors offer 2/10, net 30. That is, SP recelves a 2 percent cash dis count If it pays within 10 days and Is allowed 30 days 2/10, 45. Stanlgw nuld otenurse be rreful not to take en lona to nar as to podanucr his credit standing 2.Offer more ent cing cred it terms in order to shorten the frm's average collec- tion perlod. SP currently 3Jimit ernwth tn what can be internally financed. 4.Take in a partner. Taing in a partner represe ng option. 3aley beltwla, With some assurne managerial resporsibilitins. Such a person properly sele cled would al low Stanley to ronoentrale on the technical side of the company that enjoys so much. thi Thik u K ini rk t, aidi L il rad True, no single one of these minibanks provides much financing, but put them all together and I bet you'll end up with a sizeable amount, especially if you can locate more suppliers willing to let you take 45 days more cash fur vuu. And Rotherls has a su ulion tarcirus SP did.dd . to l olam firm's bad debt expense, which Is 1.3 percent of sales. thes STANLEY'S REACTION After some thought he decides to consider altering SP's cred t terms from net 30 to 3/10, 30: that is, he he 3 percent alscount uto ays, and 30 0ays ha edt standards. Stanley believes that 50 percent of sales will involve the 3 percent discount, and these buyers will take the full 10 days to pay. He also thinks that 30 percent of the sales will be paid on day 30 and 10 late on day 50. Further, bad debt expense, including collection costs, is predicted to be 0.7 The proposed changes in SP's credit terms and standards should affect sales in two ways. On one hand, esult in sP si supe cuslurrers Slanle dils an incueof5 ercentin sales (tiate: The forasts in Exhibit 2 are based on the existing credit policy) Variable cost i les. The percent of sales method can be used determine inventory reguirements, and the appropriate after-tax cost of capital required return) is 12 percent for any funds ted up in receivables and inventory. Plant and equipment neecls will remain editted to remain at 75 perrent o the relatvely modest seles clellee H nnlices th Changes. As Stanley questions to answer: Is it a good idea to alter the terms of credit? Is it a good idea to tighten credit standarcs? For the time being, he decides evaluate them together but thinks it makes more sense to discqunt, While 5P's prenl crrdil lerms are more tynical of what rprs on in the industrv. cash discoun are not unheard of. Stanley realizes that his sales projections implicitly assume little reaction from SP's competitors, which he thinks is "very likely but not certain. In any event, Stanley doesn't expect any widespread reaction and believes that in the worst case there ls e no change in predicted sales. ill QUESTIONS 1.Evaluate Roberts's assertion that "it's clear you need to stiffen credit standards since your bad clebt percenta *mquite) high for a lirm in your ine ef business."You may assuTie far the sake cf argument t 's bad debt percentage gh. 3. a). Estimate SP's days sales outstandin, that is, its average collection period (ACP), assuming the made. ord b) Complete Fxhihit Ic). Complete Exhibit 4