Garcia Industries has sales of $200,000 and accounts receivable of $18,500, and it gives its customers 25 days to pay. The industry average DSO is 27 days, based on a 365-day year. If the company changes its credit and collection policy sufficiently to cause its DSO to fall to the industry average, and if it earns 8.0% on any cash freed-up by this change, how would that affect its net income, assuming other things are held constant?

$488.77

Explanation:

Rates : 8%

Sales : 167,500

A/R : 18,500

Days in Year 365

Sales/Day: 458.90

DSO : 40

Industry DSO : 27

(x / 167,500) x 365 = 27

Solve x = 12,390.41

x = This is the sum to be deducted for receivable accounts.

18500 - 12,390.41 = 6,109.59 decrease in Accounts Receivable

6,109.59 x 8% = 488.77

Interest earned and net revenue generated.

cognitive overload: having a lot on your mind impairs decision-making and tends to result in the simplest, but not necessarily best, option being selected.

empathy gaps: overlooking how you might feel in a different situation can result in unnecessary purchases, such as overbuying when shopping for food on an empty stomach.

optimism and overconfidence: wearing rose-tinted glasses and having unrealistic expectations about the future can affect money management and leave you unprepared for a change in circumstance.

instant gratification: seeking instant gratification drives impulsive spending and can undermine long-term planning and savings.

harmful habits: automatic or mindless behaviour can amplify a poor financial decision as it becomes a recurring event.

social norms: we are heavily influenced by the actions of others; while this can be in certain circumstances, it also contributes to the pressure to keep up with the joneses through conspicuous consumption.

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