Discussion Question
Regional Textile Limited (RTL) purchases raw material from various vendors with an average payment period of 45 days. Most of the sales are on credit and average collection period is 50 days. There is a gap between the cash collection and payment as the management is unable to recover debts within 45 days.
Required
What measures can be taken by RTL to reduce the above stated gap?
Solution:
The Regional Textile Limited (RTL) has to take money from the bank as loan/credit to pay the vendors on 45th day. When RTL recover it from debtors this will be used in settling in their loans, but there is additional cost incurring and that is interest. When we get loans from banks we have to pay the interest.