Blue Jays Cash Flows

Blue Jays Cash Flows

Introduction

Blue Jays is a knitwear manufacturing company, selling through retail outlets. It is expected that in the first three months of the year 2014, the company would be facing temporary shortages of funds. The report analyses the available alternative strategies to be executed so as to meet the shortages and the company ensures that the regular operations of the business are conducted in a smooth and efficient manner.

Discussion

Effects of Delayed Payments to Creditors on Cash flows

The company could delay the payments to the suppliers from whom the company purchases wool in the month of January, February and March of the year 2014. This would require increasing the accounts payable and in the short-term, the out flow of cash would be avoided. Through delaying payments to trade creditors, the company would be avoiding immediate payments of the wool purchases and in this manner the short term budgeted deficit of cash could be met. The company would pay the creditors half of the amount at the end of two months and the rest half at the end of three months from the date of invoice. In this manner the company would be avoiding a short term cash outflow in the month of the invoice date. The company could use these funds for other operations of the business for which it is facing shortages of finance.

Presently the company pays all the amounts owed to suppliers within one month of the date of invoice and avails 2.5% discount. However, the company would have to compromise on this discount for financing through delaying payments to creditors. This source of financing the funds would be carrying no additional costs and would be readily available, but careful attention should be paid on managing the accounts payable to avoid negative effects on the company's creditworthiness (Abraham, Glynn, Murphy & Wilkinson, 2008).

Effects of Discounts to Trade Debtors on Cash flows

The company could also follow a policy of offering discounts to its trade debtors and hence providing an incentive for them to make early payments of the amounts owed in terms of credit sales. Presently, 10% of the debtors pay after one month of the date of invoice, 36% after two months and the rest 50% after three months and the remaining 4% are treated as bad debts. The new policy would encompass offering a 3% discount on payment made within one month of the date of invoice and thereby it is anticipated that 50% of the customers would pay within one month to avail the discount. Further, it is expected that 22% would be paying after two months and 25% after three months of the date of invoice and thereby leaving bad debts to be 3%. The new policy would call for immediate cash inflows to be generated and hence enabling the company to meet its short term cash deficit (Klaras, 2013). However, there would be a reduction in cash generated as the company would be offering a 3% discount ...