As the owner of a small automobile car parts company, being approached by a prominent vehicle manufacturer to supply products is a significant opportunity that one should not ignore. However, it’s a good idea to determine whether the manufacturer has a good record of paying its suppliers and servicing its debts before making the right decision. For this reason, some of the things that the owner of the small company should focus on include the credit rating report, aged accounts payable, and follow up with other existing suppliers to know whether they receive their payments on time (Vanauken, Ascigil, & Carraher, 2017).
Furthermore, there exist several things that an individual should check in financial statements to identify whether the car manufacturer has bad debts. They include increasing inventory, growing receivables, poor patterns of cash flow, and non-operating income (Droms & Wright, 2015). A rising inventory means that a company is not selling its products, which means that finished goods stay on shelves for an extended period. In addition, growing receivables indicate that customers are less likely to pay what they owe the firm. Poor patterns of cash flow show that the company is not collecting its receivables or it is struggling to settle outstanding loans.
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In essence, allowing customers to buy things on credit have various merits and demerits. The advantages are that it increases sales and the demand for supply, bolsters trade debts, expands market value that makes a firm to gain a competitive advantage, and facilitates business stability. On the contrary, some of the disadvantages include the failure of debt repayments by clients and slow cash flow (Droms & Wright, 2015). Furthermore, the company ought to pay a fee to the collection agencies to recover goods for customers who have defaulted to pay what they owe it.
References
Droms, W. G., & Wright, J. O. (2015). Finance and accounting for nonfinancial managers: All the basics you need to know (6th ed.). New York, NY: Book Basics.
Vanauken, H. E., Ascigil, S., & Carraher, S. (2017). Turkish SME’s use of financial statements for decision making. The Journal of Entrepreneurial Finance, 19 (1), 1-31.
