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ACCA Applied Knowledge · Business and Technology · Accounting and finance functions within business organisations

A manufacturer is concerned that it often runs out of cash even though it is profitable. Its credit controller proposes to speed up collection from customers. Which of the following cash management actions would most directly improve the company's cash position?

Offering customers a settlement discount for early payment most directly improves cash, because receivables are collected sooner. Paying suppliers early and holding extra inventory consume cash, while shortening depreciation periods is a non-cash accounting change that has no effect on the cash balance.

  1. APaying suppliers earlier than the agreed credit terms
  2. BIncreasing the inventory held to avoid stockouts
  3. COffering customers a settlement discount for early paymentCorrect
  4. DDepreciating non-current assets over a shorter period

Explanation

A settlement discount encourages customers to pay sooner, converting receivables to cash faster. Paying suppliers early and holding more inventory both tie up or use cash. Changing depreciation is a non-cash accounting adjustment and does not alter cash flow.

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