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Question 24 (a) Why is liquidity an objective of financial management? (b) How could a business improve management of its accounts receivable turnover? - HSC - SSCE Business Studies - Question 24 - 2018 - Paper 1
Question 24
Question 24 (a) Why is liquidity an objective of financial management? (b) How could a business improve management of its accounts receivable turnover?
Worked Solution & Example Answer:Question 24 (a) Why is liquidity an objective of financial management? (b) How could a business improve management of its accounts receivable turnover? - HSC - SSCE Business Studies - Question 24 - 2018 - Paper 1
Step 1
(a) Why is liquidity an objective of financial management?
Answer
Liquidity is a fundamental objective of financial management as it ensures that a business can meet its short-term obligations. Having sufficient liquidity allows a firm to pay its bills on time, manage unexpected expenses, and take advantage of immediate investment opportunities. Overall, it contributes to the financial stability and operational efficiency of a business.
Step 2
(b) How could a business improve management of its accounts receivable turnover?
Answer
To improve the management of its accounts receivable turnover, a business could implement the following strategies:
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Tighten Credit Policies: Reviewing and tightening credit policies can help ensure that only customers with a strong credit history are extended credit, thereby reducing the risk of defaults.
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Invoicing Efficiency: Ensuring that invoices are sent out promptly and accurately can minimize delays in payment. Utilizing automated invoicing systems can enhance efficiency.
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Regular Follow-ups: Actively following up on outstanding invoices can prompt customers to pay faster. Establishing a systematic follow-up schedule can ensure no payment is overlooked.
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Offer Discounts for Early Payments: Offering incentives such as discounts for early payment can encourage customers to settle their accounts more quickly.
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Monitor Accounts Receivable: Regularly reviewing accounts receivable aging reports helps identify problematic accounts and allows the business to take necessary actions promptly.