V.

Analysis 

Strengths, Weaknesses, Opportunities, and Threats (SWOT) Analysis

In order to provide insights for the advantages and disadvantages of each alternative, all
the alternatives will be evaluated by conducting SWOT Analysis. Factors that influence the
company’s usual course of actions will be identified to further support their business decisions.

Accounts Receivable
Improve Credit Terms and Collection Policies
Strengths Weakness
 Clear and unambiguous terms and policies  Cost of cash discounts 
 Favorable discount periods  Decrease in Customer Relationship
 Window period for receivable and payables

Opportunities Threats
 Stimulate early payments and cash  Unchanged customer behavior in their
realization payments
 Improved financial management  Risk of bad debts
 Reduces risk of cash shortage
 
Evaluate Credit and Collection Departments
Strengths Weakness
 Retains credit-worthy customers  Decrease in Customer Relationship
 Incentivizes collection agents

Opportunities Threats
 Insure collectability of credit  Credit sales will decline
 Creates internal competition among
collection agents
 
Inventory
Lessen Inventory Production
Strengths Weakness
 No additional production costs  Low sales on older inventories
 No excess inventories
 Lower Cost of Goods Sold (COGS)

Opportunities Threats
 Risk of obsolescence is decreased  Customers will not buy old
 Increase in Profit inventories
 Income Tax Benefit/Reduction of Tax Liability
 
Encourage Additional Sales and Improve Marketing Strategy
Strengths Weakness
 Improved Marketing Strategy  Cost of sales discounts
 Discount on old inventories  Additional administrative costs

Opportunities Threats
 Increase in sales  Customers will not buy old inventories
 Risk of obsolescence is decreased

Financial Analysis

The alternatives presented above will also be measured according to the following criteria:

Criteria Percentage

Liquidity 40%

Profitability 25%

Effect on Financial Management 25%

Ease of Implementation 10%

Total 100%

As what has been stated, the company’s major problem lies on their Accounts
Receivable and Inventory Management. This also caused cash shortages and was evidenced
by the decline in the liquidity levels of the company for the past year. Assessment of alternatives
are presented below to provide a course of action in response to Sabin Electronics concerns
regarding their financial situation. 

Accounts Receivable
Based on the figures presented above in relation to the company’s liquidity, it can be
strongly inferred that Sabin Electronics' approach on the collection of credit is inefficient. For the
year 2020, the average collection period increased five (5) days as compared to the previous
year and is 10 days higher than the industry average. Considering their current credit terms of
2/10, n/30, a minority of the customers probably availed themselves of the discount while the
majority paid almost after a month on the average.
Alternative 01: Improve Credit Terms and Collection Policies. This course of action is an
appropriate measure for the company in solution to their inefficient credit policies. Firstly, one of
the main reasons why the company’s collection period is increasing maybe is due to the
ambiguity of its terms and policies. It should be made clear to the customers as to when the
company is expecting the payment from them. 
Secondly, it can also be highly suggested that their discount period should be modified
to a higher rate or even for them to provide an additional discount period (ex. 3/10, 2/15, n/30)
to make their credit terms and collection policies more enticing, because on the average, just a
minority of their customers probably took advantage of the extended discounts. However, along
with this provision is the additional cost of cash discounts that the company might incur instead
of fully realizing the amount of sales.
Along with incentivizing customers for early payments, the company should also be strict
towards late payments, and establish penalties or charges to customers who failed to settle their
respective credits within the term. Lastly, credit terms and collection period can be improved
further by arranging a window period for receivables and payables to provide a more
synchronous and favorable cash flow where receiving credit happens first before extending
them. This will allow the company to address cash shortage effectively. This however will also
result to clients being discouraged to purchase on credit since the terms and policies will not be
as lenient as before.
With this alternative, liquidity ratios will improve significantly since collection period will
potentially decrease and cash realization will be more frequent than before. With the improved
terms and policies, the company’s risk from uncollectability or bad debts will also decrease. And
with a favorable discount period, sales might also be stimulated as well as the collection of
payments, therefore their overall profits will be most likely to increase. On the aspect of financial
management, since liquidity will be improved, a favorable effect in the availability of cash will be
observed. There will be no need for external financing that might burden the company in terms
of long-term debts. Furthermore, as far as implementation is considered, modifications like
establishing (1) clear and enticing credit terms, (2) favorable discount periods, and (3) window
period for receivables and payables; will really be possible since these will not incur relevant
costs because it is just considered as a part of management decision.

Alternative 02: Evaluate Credit and Collection Departments. This course of action is also
an appropriate measure for the company in solution to their inefficient credit policies. Aside from
improving the credit terms and policies the company may opt to modify rules in their credit
department. Credit customers will be evaluated according to their credit rating to insure
collectability and their creditworthiness. With this credit transactions with customers with bad
ratings will be discouraged. However, a result of this modification will maybe affect client
relationship since customers will not be encouraged anymore to avail their credit opportunities
due to added restrictions and qualifications.
Additionally, the management can also employ positive and/or negative reinforcements
towards its department employees or agents in terms of establishing a certain quota when their
respective credit customers settle their debts earlier. It should also be noted that with this type
of performance compensation, internal conflicts may result due to competition.
With this alternative it will improve cash realization as well as its collection period. In
terms of profitability, it does not contribute significantly since commission expenses will be
expected and it might discourage sales and potential credit customers who have doubts on their
credit ratings. On the side of financial management, it will not also contribute as much since
credit sales might decline due to its effect on client relationship. However, it will be easily
implemented in the management since compensation towards employees will be proposed

Alternatives Criteria Total

C1 C2 C3 C4

Improve Credit Terms and Collection Policies .4 .19 .25 .1 0.94

Evaluate Credit and Collection Departments .4 .13 .13 .08 0.74

 
Inventory
Aside from the problem with the company’s accounts receivable management, Sabin
Electronics seems to handle its inventories inefficiently as well. Based on the figures presented
above with regards to the company’s sales period, it can be inferred that their system in
converting its inventories into sales is ineffective. For the year 2020, the average sales period is
73 days, which means that it takes two more weeks to completely sell these inventories in
comparison to 2019 data and it is 13 days longer compared to industry average. As a result of
this slow interval, the company accumulated more cost on inventory than last year’s operation. 
With this, Sabin Electronics’ exposure to obsolescence risk grows as its average sales
period lengthens. In this type of industry where the major source of financing is heavily
dependent on production, the production level should be monitored alongside its efforts to cash
sales collections. As they did not probably consider their production level and efforts to cash
sales collections simultaneously, Sabin Electronics resulted in overproduction which then made
the company highly susceptible to obsolescence.
 Alternative 01: Lessen Inventory Production. This alternative, in consideration of their
current financial situation, will be an appropriate option in order to prevent future obsolescence
risk and losses on handling and storage. Since it is suggestible that the company holds
excessive inventory, it should put its effort on securing the sales of these especially after they
released new product lines; it will be expected that the demand for these old inventories will
decrease significantly because customers do not prefer buying old stock inventories. If the
company wishes to prioritize in their new product lines, they might as well write-off their old
inventories instead of stockpiling it in order to prevent additional storage and handling costs as
well as to avail themselves of income tax benefits. Furthermore, if the company lessens their
inventory production, it will minimize their turnover period and will improve the company’s cash
position.
With this alternative, production costs and other storage and handling costs will be
prevented resulting in an increase in operational income. If the company proceeds on writing off
their old inventories and focuses their sales on the new product lines, it will reduce their tax
liability which then increases overall profits. In terms of financial management, the decrease in
turnover time will result in an efficient realization of funds therefore increasing the financial
capabilities of the company to support their operational activities. On the side of the
implementation, no additional administrative costs will be incurred since it is purely a
management decision with the intention to reduce unnecessary costs.

Alternative 02: Encourage Additional Sales and Improve Marketing Strategy. This
alternative is also appropriate on their inventory problem. Implementing a sales and marketing
strategy will improve the demand on these inventories that are prone to obsolescence by
offering discounts that will potentially improve its turnover period and cash realization. By doing
so, it will help the company penetrate the market better and lessens the risk of the new products
to end up being stockpiled. However, there is no guarantee that this will be proven effective
since only few customers buy old inventories and the company might set aside budget for
administrative cost in the implementation.

Alternatives Criteria Total

C1 C2 C3 C4

Lessen Inventory Production .4 .19 .19 .1 0.88

Encourage Additional Sales and Improve Marketing Strategy .4 .06 .13 .05 0.64