The nature of the mail-order business is such that most of Fresh & Fruity's sales are on credit; therefore, the company has historically had a high accounts receivable balance relative to sales. It has also historically been short of cash; forcing it to delay payments to suppliers as long as possible (its average ti In January 2016, Tom Appleb ruity, respectively, were discussing the cash flow problem over lunch. "You know, Tom me to pay accounts in 2015was 67 y and Alice Plummer, the president and treasurer of Alice said as she sliced a piece of avocado, "I was reading the other day about a company called Kringle's Candles & Omaments, and it occurred to me that we're a lot like them. ost of our assets are current ones, like their accounts receivable and inventory, and over of ours are financed just like theirs, by current liabilities-that is, accounts payable She paused for a si p of chardonnay, and continued, "They got around their cash flow problems by issuing long-term debt, which took the pressure off their current obligations for our company, too. But then I got to thinking, there's another I've been looking at that way that's a good deal easier and would produce results just as Oh? And what's that?" Tom replied, his interest captured All we have to do," help reduce earlier, we pay us of the 2 percent discount they offer for payments within 10 days." (Fresh quickly she said, "is to reduce our accounts receivable balance. That our accounts payable balance, since, as our customers begin paying us can, in turn, pay our suppliers earlier. If we could get enough customers to & Fruity's suppliers operated on a 2/10, net 60 basis.) That would increase our net income and right away, we could even pay some of the suppliers in time to take advanta " She looked excited free up even more cash to take advantage of even more discounts! at the prospect. Sounds great, but how do we get people to pay us earlier?" Tom inquired, doubtfully "Easy," Alice continued. "Up to now we've been giving them incentives to pay later Remember our "Buy Now, No Payments for Two Months' program? Well, a lot of our customers use it, and it's caused our accounts receivable balance to run way up. So what we have to do now is give them incentives to pay earlier. What I propose is to cancel the buy now/pay later plan, and instead offer a 10 percent discount to everyon who pays with their order." But won't that cause our revenues to drop?" Tom asked, again still doubtful. "Yes, but the drop will be offset by even more new customers who will come in to take advantage of the discount. I figure the net effect on sales will be just about zero, but our accounts receivable balance could be cut in half! Now here's a kicker I just thought of. After we've reduced our accounts receivable balance as far as practical, I'd like to look into the possibility of reducing our accounts payable still further by replacing them with a bank loan. The effective rate of interest that we pay by not taking our suppliers discounts is, after all, pretty high. So what I'd like to do is take out a loan once a sufficient size that would enable us to take all the discounts our suppliers offer. The interest that we'll pay on the loan is bound to be less than what we pay in discounts lost-so we'll see another gain in earnings on our income statement. In fact, these two initiatives together might have a really significant impact!" You've convinced me," Tom said. "Let's go back to the office and run some figures to be a result of Alice's first initiative Fresh & Fruity would be able to take advantage of the see what happens!" Assume that Alice Plummer's first initiative to offer a 10 percent discount w implemented, and the company's average collection period would drop to 32 da as to percent discount on one-third of its purchases. Fresh & Fruity can obtain an 8 percent oan for one year