Richmond plc currently offers its customer a credit period of 2 months. Currently, the company is selling on average 100,000 units of its product per year at the price of 360 per unit, hence annual revenues are 36 million. It costs 220 to produce a unit. An advisor has proposed the company increase the credit period to 3 months, which would result in an additional sale of 20,000 units while the selling price remains the same. However, the concern is the new credit term will result in more capital being held as receivables, and it will cost Richmond 10% per year to finance that additional capital need.

a. Assuming that the customers will take advantage of the new credit term and that they always pay off all debt at the end of the credit period, evaluate if Richmond should follow the advice to increase the credit period.

b. Discuss the main factors a company should consider in order to set up a good credit management system

c. Briefly discuss the following ratio:

1) inventory days

2) receivable days

3) payable days

4) cash conversion cycle

5) operating cycle