Approximately 85% of the customers at Hanson’s Furniture Store purchase furniture using store credit. The store’s average collection period is 75 days. However, the store must pay their vendors within 30 days. What is the store’s best option for maintaining their minimum cash balance?

Explanation:

Using or applying a Net 30 payment terms, having an average collection time of 75 days with the customers, Hanson's furniture store, are to either reduce their store credit option, so as to encourage let's say within 45% of their store credit customers to be able to pay upon receipt, or reduce their operating period. Which is the best option for the store to maintain minimum cash balance.

The store has to delay vendor payments for a minimum of 68 days to maintain minimum cash balance  

Explanation:

Collection Period 75 days - Vendor Credit Days 30 = 45 Day

45 Days X  85%

= 38.25

+ Vendor Credit Days 30 Days

= 68.25 Days