The bottom line is that a firm should compete on the

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Unformatted text preview: will lose business; if its terms are less restrictive than its competitors’, it will attract poor-quality customers that probably could not pay under the standard industry terms. The bottom line is that a firm should compete on the basis of quality and price of its product and service offerings, not its credit terms. Accordingly, the firm’s regular credit terms should match the industry standards, but individual customer terms should reflect the riskiness of the customer. Cash Discount Including a cash discount in the credit terms is a popular way to achieve the goal of speeding up collections without putting pressure on customers. The cash discount provides an incentive for customers to pay sooner. By speeding collections, the discount decreases the firm’s investment in accounts receivable (which is the objective), but it also decreases the per-unit profit. Additionally, initiating a cash discount should reduce bad debts because customers will pay sooner, and it should increase sales volume because customers who take the discount pay a...
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