1 Due to the launch of a new product, your company is low in cash. You have been asked to reduce Accounts Receivables, increase Accounts Payable, or both.
Please design a strategy including offering cash discounts to customers who pay in advance, letting small businesses pay with a credit card (quantify what would be the cost of accepting credit cards), and/or delaying payments to Suppliers (quantify what would be the cost of foregone cash discounts and/or destroying goodwill).
2 Many customers want to have the new products, but you dont have enough of it. Would you prioritize old customers or new customers?
My strategy to encourage customers to pay in advance is to build an exclusive member system. My company will have an exclusive pre-launch that releases new products ahead of the usual time and exclusive model (slight difference from other models), and these are only available to exclusive members. The exclusive members have to have a minimum balance on the company website’s account. When the pre=launch begins, they are free to purchase the exclusive items. The more they balance they have, the more exclusive items they can purchase. I would build a marketing campaign to emphasize on the premiums and benefits of being an exclusive member, as well as the benefits of participating in the pre-launch.
Is it moral to consider this a strategy?
The moral question is interesting. Airlines have been doing this for years. As a Platinum member one gets access to the lounge, complimentary upgrades, confirmed tickets on sold-out flights, and at the highest threshold a Mercedez Benz to pick you up from the plane and expedite immigration procedures. Does it work? One colleague of mine makes longer, weird itineraries to fly in one airline because of his status (company policy lets travelers choose the airlines if the cost of the ticket is the same or lower).
My strategy is to conduct customer credit checks before letting my clients pay with credit cards. This helps my company to identify customers with poor credit, to prevent me from not receiving payments on time. As my company offers cash discounts to customers who pay in advance, I can also offer my suppliers early payment and negotiate for a better deal. Overall, to maintain a good cash flow, my company always has to make sure account payables are not due before account receivables.
I would advise businesses to offer a cash discount to customers who pay with cash, and add additional fees to customers who use credit cards as the credit cards are charging large fees. I would also focus on retention strategies in order to keep customers coming back and spending money. I would also create a cash incentive program where customers who pay in cash are rewarded with something other than a discount, such as a free product or service after x amount of purchases. It is better to focus on the cash strategy rather than forgoing payments to suppliers because there are detrimental consequences, such as having to pay even more, losing your reputation, and getting into legal trouble.
Inventory Management:
Apple introduces iPhone 14 and iPhone 14 Plus. A new, larger 6.7-inch size joins the popular 6.1-inch design, featuring a new dual-camera system, Crash Detection, a smartphone industry-first safety service with Emergency SOS via satellite, and the best battery life on iPhone. According to the Apple Balance Sheet 2021, Apple had Total asset of 351,002,000, Total Liabilities of 287,912,000, and Total Equity of 63,090,000. To calculate how many units to have on Inventory, first looking at Net sales for iPhone for 2021 was $ 191,973 million. As of 2021-09-25, Apple had Cost of Goods sold of $213 billion, Average inventory of $5.321 Billion; therefore the Inventory Turnover for fiscal year 2021 would be 40.0x. The Inventory Turnover ratio measures the number for times a company’s inventory is sold and replaced over a year. A low turnover ratio can serve as a leading indicator of poor sales (excess inventory) while a high ratio may imply strong sales. Therefore, Apple’s high ratio of Inventory Turnover indicates the strong sales for the new product. To deal with the strong sales for the new product, Apple allows customers to pre-order to receive new products on a first-come-first-serve basis. The pre-ordering through digital platforms can increase sales for new products and visualize the hype of demand for new products.
I am speaking on behalf of the Apple company. Our focus would be to continue to increase the apple card usage of customers by giving them exclusive deals and offers of different companies upon purchasing our products with no processing fees. Our plan is to soon allow customers to open savings accounts using apple card where they could deposit their daily cash rewards and funds at zero charges. Also, we would bring more rewards and cashback offers for clients who make purchases more than 500$ per user. This will help us to decrease our receivables. At the same time, we would like to increase our accounts payable, especially after 2020 where we had to pay our suppliers upfront, thereby decreasing our payables. We would negotiate our credit terms by including a discount of 10% for payments made in 60 days or change terms to 90 days from 60 days as well as continue the consignment model where payment is due only when the product is sold. In short, this is how we aim to reduce receivables and increase payables to control the effect of the new product launch.
As for Apple, when the company is low in cash, there are multiple ways to reduce Accounts Receivables and increase Accounts Payable. In the case of lowering Accounts Receivables to receive revenue faster, as suggested, the company could offer cash discounts for advance payments to entice consumers to make payment sooner. By leveraging & encouraging Apple Pay, it will help streamline process making payment more seamless. Moreover, for those users using Apple Card, we could implement a 2% cashback program for monthly spending of $1000. Furthermore, for Apple Services, by offering users auto-pay function would help the company to collect monthly payments easier and faster. As a result, these methods would help reduce the firm’s Accounts Receivable. On the other hand, to reduce Account Payable, Apple has high bargaining power to negotiate with its supplier to extend their credit term to 90 days.
For this situation, I have two strategies. The first is to support early payment or encourage cash payment. Cash payment is the fastest, does not need to be reviewed by the bank, and has very little risk. There will be no instances of unpayment (such as invalid checks). And banks are really really, really slow for security. So we can offer some small gifts or discounts.
The second method is to really review the qualifications of new cooperative companies. Make sure the other party is able to pay. Especially when there are many expensive commodities (such as luxury houses, gems), there must be proof of assets. I don’t know if it is legal to find a third-party agency to freeze some assets in many countries. That is to say, let the buyer hand over the money to a third-party organization first, and then the third-party organization will hand over the money to the seller (us) after the transaction is established.