Respond To Question 5 From Chapter 8 Of The Textbook ✓ Solved

Respond To Question 5 From Chapter 8 Of The Textbook Consider The Fol

Respond to Question 5 from Chapter 8 of the textbook: Consider the following statement: "The fewer the uncollectible accounts, the better." Can you think of instances where this might not be the case? Support your points with an example of why fewer uncollectible accounts may not be better for business. Participate in follow-up discussion by reviewing the fact patterns described by classmates and change them to try to prove the point that fewer uncollectible accounts are not better.

Sample Paper For Above instruction

The assertion that fewer uncollectible accounts are inherently better for a business is a common presumption rooted in the idea that high receivables collection rates directly translate into improved financial health. However, this perspective can overlook some important nuances and potential strategic considerations. In specific instances, aiming solely to minimize uncollectible accounts may not be advantageous for a company’s overall long-term success.

One notable example where fewer uncollectible accounts might not be better involves aggressive credit policies that extend credit too broadly in order to capture more sales. For instance, a retail company seeking rapid expansion might relax credit standards, granting credit to risky customers in hopes of increasing sales volume. While this approach might temporarily inflate revenues and reduce the immediate amount of uncollectible accounts, it can also lead to a higher incidence of defaulting customers over time (Nwogbaga, 2018). Consequently, the cost of managing more bad debts and collections, along with potential cash flow disruptions, can outweigh the benefits of increased sales.

Furthermore, an excessive focus on preventing uncollectible accounts can discourage the company from engaging with new or risky markets. For example, a manufacturing firm primarily serving large corporate clients might implement very stringent credit checks to minimize defaults. While this reduces bad debts in the short term, it can also limit the company’s growth opportunities by discouraging smaller or emerging clients who may be creditworthy but do not meet overly rigid credit criteria (Smith & Nguyen, 2020). This cautious approach could lead to lost sales, which may, in turn, hinder overall revenue growth.

In addition, overly conservative credit policies intended to minimize uncollectible accounts can adversely affect customer relationships. Customers who are denied credit or face strict repayment terms might seek alternative suppliers who offer more lenient credit terms. As a result, the business could lose valuable customers or market share to competitors. For example, a small business that refuses credit to customers with no history of defaults might push away potential loyal clients who could become profitable in the long run (Johnson, 2019).

Moreover, the pursuit of fewer uncollectible accounts can have accounting and operational implications. Companies that overemphasize collecting every receivable may allocate excessive resources towards collection efforts and credit monitoring, which could be used more productively elsewhere. This focus might divert attention from core activities like product development, marketing, or customer service, ultimately affecting the overall competitiveness and growth of the enterprise (Lee & Kim, 2021).

In reviewing and analyzing fellow students’ fact patterns, it is crucial to recognize that emphasizing a reduction in uncollectible accounts does not always align with strategic business goals. For example, if a peer argues that strict credit restrictions truly lead to better financial stability, one could counter by highlighting that such policies might suppress sales growth or customer diversification opportunities. Conversely, if a classmate’s scenario involves lenient credit policies resulting in high defaults, one could modify this example to show that in certain markets, accepting higher default levels might be a strategic trade-off to secure significant market share and future revenues.

In conclusion, while minimizing uncollectible accounts is generally desirable, it should not be the sole focus at the expense of growth, customer relationships, or strategic market positioning. Businesses must strike a balance, employing effective credit management that aligns with their broader objectives. Sometimes, accepting a higher level of uncollectible accounts can serve as a calculated risk enabling market expansion, customer relationship building, and sustained profitability over time.

References

• Johnson, M. (2019). Strategies in credit management: Balancing risk and opportunity. Journal of Financial Services, 33(4), 45-58.
• Lee, S., & Kim, H. (2021). Resource allocation and credit management efficiency. Accounting and Business Research, 51(2), 147-164.
• Nwogbaga, O. (2018). Credit policies and their impact on business expansion. International Journal of Business Finance & Management, 5(2), 23-29.
• Smith, L., & Nguyen, T. (2020). The effect of credit restrictions on firm growth. Journal of Business Strategies, 12(3), 78-92.