Question
What are the critical components of the following case: GE Capital is in the business of providing loans to small to medium companies. However, GE
What are the critical components of the following case:
GE Capital is in the business of providing loans to small to medium companies. However, GE Capitals top management believes the company is losing significant amounts of cash from delinquent accounts, and they have assigned John Barlow, a senior financial manager, to analyze the problem. After some research, John finds that GE Capital currently has 50,000 accounts. Of these, 40,000 are paid up (the company refers to these as 0-due), 4000 are one month overdue (1-due), 4000 are two months overdue (2-due), and 2000 are 3 months overdue (3-due). After an account is more than three months overdue, it is written off as bad debt.
Each month an account is overdue, GE Capital has three contact options: it can phone the company; it can send a letter to the company; or it can make no contact. Although phone calls and letters are fairly routine, they do take some time. It takes approximately 20 minutes for a letter and 40 minutes for a phone call. (Much of this time is for the contact person to assemble information on the account.) Each month, 5000 hours are available from the employees who make the contacts. GE Capitals policy is to never contact companies with 0-due accounts.
John has discovered that the average amount of a monthly payment is $10,000. Therefore, for example, if a 2-due account remains 2-due by next month, this means that one month of payment, $10,000, has been received. However, if this 2-due account becomes 0-due by next month, this means that 3 months of payments, $30,000, have been received. However, if this account becomes 3-due by next month, no payment is received.
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