Question

g "7. Explain how a company could: (a) avoid a backlog of orders when sales exceed expectations; (b) avoid product defects on new products; (c) offer more credit to its customers when it already has a bad debt problem; (d) improve its credit rating with suppliers after paying some late; (e) lower its cost of financing when the market interest rate has increased."

Answer 1

Answer and Explanation:

a. Outsource the lesser portion of the order furnishings to third parties. Likewise, the company can improve its productivity while ensuring that the core knowledge of the business is not shared.

b. Implement strict quality assurance system to ensure that goods are of the highest quality. In order to initially acquire market share it is essential to maintain quality for new products.

c. By requesting collateral or non-funded guarantees such as "Credit Letter," "Bank Guarantee," "Corporate Guarantee," etc. That would provide additional cushion to mitigate the risk of counter parties.

d. By offering over collateralize or facilities dependent on non-funding as described above. The method works in both directions.

e. By improving the company's capital structure, either by lowering its debt obligation or by infusing more promoter capital.

Better cash accrual through increased productivity will also provide support for the forthcoming cash flow that would favorably impact the liquidity risk. Risk reduction thus gives way to lower borrowing costs irrespective of the rise in market interest rates.