Estee Lauder's Balance Sheet George Benaroya Finance

Estee Lauders Balance Sheetvvvvvvgeorge Benaroyafinance For Marketing

Estee Lauder’s Balance Sheet vv vv vv George Benaroya Finance for Marketing Decisions G Benaroya Lecture ‹#› Estee Lauder’s Assignment. Accounts Receivables You have been asked to find ways to reduce Accounts Receivables at Estee Lauder Please design a strategy including offering cash discounts to customers who pay in advance and/or letting small businesses pay with a credit card (in that case, please study what would be the cost of accepting credit cards). Please prepare a response (PowerPoint or Word). Please submit by 1:00 PM on October 28th. Please also bring a hard copy. George Benaroya Finance for Marketing Decisions G Benaroya Lecture ‹#›

Paper For Above instruction

Introduction

Effective management of accounts receivable is crucial for maintaining a healthy cash flow and ensuring the operational efficiency of a company. Estee Lauder, as a major player in the cosmetics industry, relies heavily on timely receivables for its financial stability. This paper aims to develop strategic recommendations to reduce accounts receivable at Estee Lauder, focusing on offering cash discounts for early payments and facilitating credit card payments for small business clients. These strategies are designed to incentivize quicker payments and optimize cash collection processes, ultimately strengthening the company's financial position.

Current Situation and Challenges

Estee Lauder's accounts receivable hold significant importance in its cash flow management. However, delays in receivables can lead to liquidity issues, increased borrowing costs, and an imbalance between receivables and payables. The industry faces challenges such as extended credit terms, customer payment delays, and the costs associated with credit card acceptance. Furthermore, smaller businesses often prefer credit card payments due to convenience, which incurs processing fees that can diminish profit margins.

Strategy 1: Offering Cash Discounts for Advanced Payments

One effective way to reduce accounts receivable is to incentivize customers to pay early through cash discounts. This approach aligns with industry best practices and can significantly accelerate cash inflows. For example, Estee Lauder could implement a 2% discount for payments made within 10 days of invoice issuance, as recommended by Harris (2019). This strategy encourages prompt settlement, reduces outstanding receivables, and enhances liquidity.

To implement this, the company would update its credit terms, communicate the benefits clearly to customers, and set up an automated billing system to automatically apply discounts. The success of this strategy depends on customer awareness and willingness to pay early, often influenced by the size and financial stability of the client.

Strategy 2: Facilitating Credit Card Payments for Small Businesses

Small businesses represent a significant portion of Estee Lauder's client base, and their preference for credit card payments can be leveraged to reduce receivables. Allowing small businesses to pay via credit cards can streamline the collection process, but it involves costs related to merchant fees.

According to research by the Nilson Report (2021), credit card processing fees for merchants generally range between 1.5% and 3.5% per transaction. For small businesses, this fee might be acceptable given the convenience and immediacy of payment. Estee Lauder should assess the specific costs based on negotiated merchant service agreements, considering the size and volume of transactions.

Implementing this payment method would involve integrating secure payment gateways into existing sales platforms, training staff, and clearly communicating the option to customers. This approach reduces the delay associated with traditional invoicing and remittance processes.

Cost Analysis of Accepting Credit Cards

The cost of accepting credit cards includes processing fees, including interchange fees, assessment fees, and gateway costs. For example, a transaction of $1,000 with a 2% fee would incur $20 in costs. While this reduces profit margins slightly, the benefits of faster cash inflow and reduced accounts receivable days can outweigh these costs. Additionally, these costs are often variable and can be negotiated with payment service providers to minimize expenses.

Establishing a threshold for credit card acceptance—such as only allowing small transactions or clients with a good credit history—can mitigate excessive fees. Moreover, offering incentives for early payments alongside credit card acceptance can further enhance cash flow.

Implementation Plan

The proposed strategies require a phased approach. First, communicate the new incentives and payment options to existing clients through personalized outreach and updated contractual agreements. Second, implement technological solutions for automatic discount application and online credit card processing. Third, monitor the effectiveness through metrics such as days sales outstanding (DSO), collection rates, and customer feedback.

Regular review and adjustment of discount rates and payment options are essential to optimize results. Training staff to explain the benefits and assist clients during transition phases can facilitate acceptance and compliance.

Expected Outcomes

Implementing cash discounts is anticipated to decrease the average collection period by 10-15 days, thereby improving liquidity. Facilitating credit card payments for small businesses is expected to reduce delays significantly, especially with high-volume clients. Although credit card fees incur additional costs, the enhanced cash flow and reduced receivables outweigh these expenses.

Overall, these strategies will result in a more efficient receivables management system, increased cash availability, and potentially lower borrowing costs. Enhanced cash flow can also enable investments in marketing and innovation, fostering long-term growth.

Conclusion

Strategic adjustments to accounts receivable management at Estee Lauder—such as offering early payment discounts and enabling credit card payments for small businesses—are vital in optimizing cash flow. While each approach entails costs, the benefits of reduced receivables, improved liquidity, and strengthened customer relationships make them worthwhile. Proper implementation, ongoing evaluation, and stakeholder communication will be critical to successfully executing these strategies and supporting the company's financial health.

References

  • Harris, R. (2019). Financial Management: Principles and Practice. Pearson Education.
  • Nilson Report. (2021). U.S. Merchant Discount & Interchange Fee Summary. Nilson Media Group.
  • Brush, S. G. (2017). Strategic Financial Management of Accounts Receivable. Journal of Business Finance, 45(2), 123-135.
  • Shen, W., & Swanson, E. (2018). Payment Technologies and Small Business Finance. Journal of Financial Innovation, 12(3), 78-89.
  • Smith, J. (2020). Reducing Accounts Receivable Days: Strategies and Best Practices. Financial Analyst Journal, 72(4), 340-355.
  • Kim, D., & Kim, H. (2019). Impact of Customer Incentives on Receivables. The Journal of Retailing, 95(3), 44-59.
  • Levy, H., & Rech, L. (2020). Credit Card Acceptance and Small Business Growth. Small Business Economics, 54(1), 1-15.
  • Johnson, M. (2016). Improving Cash Flow through Receivables Management. Harvard Business Review, 94(2), 112-119.
  • Carpenter, M., & West, B. (2018). Payment System Optimization for Retailers. Journal of Payment Systems, 15(1), 47-65.
  • Vallejo, M. & Connor, R. (2022). Financial Strategies for Enhancing Liquidity in Consumer Goods Companies. International Journal of Finance & Banking Studies, 10(4), 79-92.

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