Answer the questions Essay Example

Financial Management 4

Financial Management

Question One: You notice that your Accounts Receivable Days Outstanding has doubled in the first 6 months of the fiscal year. Do you give someone a bonus or put someone on probation?

Accounts receivable basically represents the amount of money owed to a business or n individual, the debtor mainly being the customer. Being money owed to the business, accounts receivable is counted as an asset, and not a liability, on the balance sheet. Every business has to have a good customer financial management strategy, and calculating the accounts receivable and payable days outstanding is one of these strategies. No business can be successful if it doesn’t put in place an apt credit policy by which it evaluates credit of its customers (Brigham & Ehrhardt, 2010).

If the business takes a long time to collect its debts, then this can indicate several things. Fist and foremost, this can indicate that the customers are not satisfied with what the business offers to them, thus forcing the salesmen of the business to “bribe” the customers by giving them more time for repayment. It could also indicate that the customers being sold to are not credit worthy, hence prompting the business to be stricter in giving credit to these customers. However, longer periods of collecting debts could indicate that the staffs in the debts and collection department or the accounts receivable departments are not efficient in their work. Inefficiency by the staff members can cost the business a lot, and this can also impair the cash flow of the same. The responsible staff members can either be given bonus or can be put on probation. If the reason for the accounts receivable days doubling is low satisfaction of customers, then the staff should be given bonus as motivation for better work. If their inefficiency is the cause, then they should be put on probation (Brigham & Ehrhardt, 2010).Question Two:
Before making a loan, bankers will closely evaluate an organization debt/equity ratio. Explain why this ratio is so important to bankers.

The debt-equity ratio is one of the debt ratios used by financers and investors in determining the creditworthiness of any business. The debt-equity ratio basically represents the ratio of the company’s liabilities and debts to its equity. This ratio is very important to bankers before giving loans because it helps them to evaluate the level to which the business relies on debts and liabilities to run. If the business has a low debt-equity ratio, then it is safe, or so to say, to give to it a loan. However, if the ratio is high, then it indicates that the business has much more liabilities and debts than the equity it has, meaning that the business has many debts and loans on which it relies for its running. Therefore, it is obvious that in such a scenario, most of the money the business gets goes into settling the debts, loans and accumulating interests. It would therefore be somewhat tricky to give a loan to such a business that already has an overload of debts and loans (Brigham & Ehrhardt, 2010).

A business that has a low debt-equity ratio shows that it runs its affairs using different funds other than loans, and such a business is in a better position to handle a loan when it is given, because a very small portion of its revenue is used to repay debts, and this also means that most of its assets are free, in that they are not collateral for any loan. This ratio shows the financial standing of a business, and therefore a high debt-equity ratio shows that the business has very low financial security. Since no bank wants to risk having its loan not repaid, most banks will either decline giving loans to such a business or will take action to counteract the high debt-equity ratio. To counteract it, the bank can either channel all extra revenue the business gets into loan repayment or it can restrict the way the business uses its cash. Alternatively, the bank can put more pressure on the investors of the business to tie more assets into the business, so that the bank will have more collateral to count on (Brigham & Ehrhardt, 2010). Question Three: You are responsible for pricing a new service at an outpatient surgery center. How do you go about determining what you will charge for the service? How is this different than pricing physicals for the clinic?

Putting a price tag that is not biased on a service with precision is not an easy task. However, the right approach needs to be taken, because the business also needs to meet its costs and to make profits also. It is important to note that pricing is not an independent factor in determining whether or not an organization will make profits; it is only part of the many factors such as marketing strategy, human resource management, leadership and empowerment, competition and demand (Brigham & Ehrhardt, 2010).

To set the price for services in a health center, the cost of a particular service can be determined after which an additional amount can be added onto the cost to ensure profitability. Checking on the prices of competitors and other health centers can also be used to set the prices on the services. Also, the prices can be set according to the value of these services to the customers. This is because the service can be worth $100 but the customers are willing to pay $500 for it. Another determining factor is who pays the bills. Some health insurers pay more for the same service than other health insurers. However, pricing services is more difficult that pricing physical products, simply because it is very easy to account for all the costs of producing and availing the physical products. However, pricing a service should be based on the costs and values of the intangible qualities such as the expertise of the workers, the worth of the service to the customers and even the value of the time spent in giving the particular service. It therefore becomes very hard to put the exact value on these intangibles (Brigham & Ehrhardt, 2010).


Brigham, Eugene & Ehrhardt, Michael. (2010). Financial Management: Theory and Practice. New York: Cengage Publishers.