Case Study: Stanley

Products Credit
Policy
Group No: - Analysis and Discussion
Sruti Agarwal: A91801923214
Nikita Dutta: A91801923213 Programme: MBA, Sec (A), Semester: 2
Tirna Kundu: A91801923195 Paper: Financial Management
Srjita Bagchi: A91801923210 [FIBA601]; Batch: 2023-25
Sanchita Das: A91801923026
Arijit Maitra: A91801923216
Content

Synopsis of the Case Questions for

Study Discussion

Conclusion & Key

Solutions
Takeaways

17/05/2024 Stanley Products Credit Policy 2

Synopsis of the Case Study

17/05/2024 Stanley Products Credit Policy 3

 Summary of the Case Study (1/2)
• Stanley grew up in his dad's sealant business and four years ago, in 2011, decided to start Stanley Products (SP), his
own company. A chemistry major, Stanley thoroughly enjoys the research and development side of the business, which
he pursues mainly on weekends. SP has something of a regional reputation, and sales reached nearly $1 million in the
most recent fiscal year. At the suggestion of a colleague, Faith Allen, Stanley set up exhibits at several trade shows.
Based on advance orders and the unusually large number of product inquiries, Stanley believes that sales will increase
by over 40 percent next year (2016) and will more than double in three years. These forecasts flatter Stanley's
scientific side because they imply that users recognize the technical superiority of SP's products. His business side is
more cautious, however. Such large growth will undoubtedly require external financing, and Stanley is unsure how
best to raise any needed funds, especially since his ability to supply capital is quite limited.
• Stanley's first reaction is to approach First National, SP's bank. No formal request has been made, but conversations
with Tina McClellan, a Loan officer, indicate that the best rate Stanley can expect is 13 percent, somewhat higher than
Stanley expected. The main problems, McClellan explained, are the soft economy and regulators who are forcing
banks to be stricter. Discouraged by this conversation, Stanley met with Tim Roberts, a lifelong friend and Stanley's
informal business adviser. Over lunch they listed other options that Stanley might pursue.

17/05/2024 Stanley Products Credit Policy 4

 Summary of the Case Study (1/2)
• Impressed with Roberts's arguments, Stanley decides to pursue these options first. After some thought he decides to
consider altering SP's credit terms from net 30 to 3/10, 30; that is, he would offer a 3 percent discount to customers
who pay within 10 days, and 30 days of credit would be offered to customers who pass up the discount. At the same
time he would also tighten SP's credit standards, as Roberts suggested. The proposed changes in SP's credit terms and
standards should affect sales in two ways. On one hand, the cash discount will attract new customers. On the other
hand, the tighter credit standards will result in SP losing some customers. Stanley believes, however, that the sales-
enhancing effect will dominate, and he predicts an increase of 5 percent in sales. He notices that there are really two
separate questions to answer: Is it a good idea to alter the terms of credit? Is it a good idea to tighten credit standards?
For the time being, he decides to evaluate them together but thinks it makes more sense to evaluate each one
separately.
• While SP's present credit terms are more typical of what goes on in the industry, cash discounts are not unheard of.
Stanley realizes that his sales projections implicitly assume little reaction from SP's competitors, which he thinks is
"very likely but not certain." In any event, Stanley doesn't expect any widespread reaction and believes that in the
worst case there will be no change in predicted sales.

17/05/2024 Stanley Products Credit Policy 5

Questions for Discussion

17/05/2024 Stanley Products Credit Policy 6

 Questions for Discussion (1/3)
1. What are the primary objectives for Stanley Products (SP) in considering alterations to its credit policy?
Are these short-term or long-term objectives, and how do they align with the overall strategic goals of
the company?
2. What are the potential advantages and disadvantages of each option proposed by Tim Roberts,
particularly delaying trade discounts, improving credit terms, and restricting growth to internally
available funds?
3. What are the potential risks associated with each proposed alteration to SP's credit policy, such as
tightening credit standards or modifying credit terms? How might these risks impact the financial
stability and growth prospects of the company?
4. What are the implications of altering credit terms from net 30 to 3/10, 30 for SP's cash flow
management and working capital requirements? How might this impact the company's ability to meet its
short-term financial obligations and invest in future growth opportunities?
5. Determine the cost to SP of forgoing the cash discount assuming credit terms of: (a) 2/10, net 20; (b)
3/10, net 30.

17/05/2024 Stanley Products Credit Policy 7

 Questions for Discussion (2/3)
6. Evaluate Roberts's assertion that "it's clear you need to stiffen credit standards since your bad debt
percentage seems (quite) high for a firm in your line of business." (You may assume for the sake of
argument that SP's bad debt percentage is in fact quite high.)
7. What considerations should Stanley take into account when assessing the potential reaction of SP's
competitors to the proposed price discount and changes in credit terms? How might competitors adjust
their strategies in response, and what implications could this have for SP's market position and sales
projections?
8. In considering the option of bringing in a partner for additional capital and managerial support, what
criteria should Stanley use to evaluate potential candidates? What are the potential benefits and
drawbacks of this option compared to the alternatives?
9. As Stanley noted, there are two changes: easier credit terms and stricter credit standards.
a) Which change is more likely to trigger a reaction from SP's competitors? Explain.
b) In judging the reaction of Stanley's competitors to the price discount, how relevant is the following
information about the average collection period in the industry? The median ACP is 44 days, and
25 percent of the industry firms have ACPs of less than 33 days.

17/05/2024 Stanley Products Credit Policy 8

 Questions for Discussion (3/3)
10. Complete Exhibit 4.

17/05/2024 Stanley Products Credit Policy 9

Solutions

17/05/2024 Stanley Products Credit Policy 10

Q1. What are the primary objectives for Stanley Products (SP) in considering alterations to its credit policy? Are
these short-term or long-term objectives, and how do they align with the overall strategic goals of the company?

The primary objectives for Stanley Products (SP) in considering alterations to its credit policy are:
• 1. Improving cash flow: By offering a discount for early payment and tightening credit standards, SP aims
to encourage faster payments from customers and reduce bad debt expenses, thus improving its cash flow.
• 2. Facilitating growth: SP anticipates a sales increase by attracting new customers with the cash discount.
This growth aligns with the company's strategic goals of expanding its market presence and increasing
revenue.
These objectives are both short-term and long-term in nature. In the short term, SP aims to address immediate
financial challenges such as cash flow constraints and bad debt expenses. In the long term, the company
seeks sustainable growth and financial stability, which align with its overall strategic goals of expanding
market share and increasing profitability.

17/05/2024 Stanley Products Credit Policy 11

Q2. What are the potential advantages and disadvantages of each option proposed by Tim Roberts, particularly
delaying trade discounts, improving credit terms, and restricting growth to internally available funds?

Potential advantages and disadvantages of each option proposed by Disadvantages:

Tim Roberts: • Offering discounts could decrease profit margins.
1. Delaying Trade Discounts: • Tightening credit terms may alienate some customers, leading to
a loss in sales.
Advantages:
• Risk of increased bad debt if customers default despite tightened
• Immediate increase in cash flow as payments to suppliers are
credit standards.
deferred.
• Can help manage short-term cash flow constraints without taking 3. Restricting Growth to Internally Available Funds:
on additional debt. Advantages:
Disadvantages: • Avoids taking on additional debt, reducing financial risk.
• May strain relationships with suppliers if they rely on timely • Encourages efficient use of internal resources and capital.
payments. Disadvantages:
• Risk of losing trade discounts, potentially increasing costs in the • Limits the potential for rapid expansion, potentially missing out
long term. on market opportunities.
• Suppliers may become less willing to extend favorable terms in • May hinder competitiveness if competitors are expanding more
the future. aggressively.
2. Improving Credit Terms: • - Could lead to slower growth and lower market share in the
Advantages: long run.
• Potentially accelerates cash collections, improving liquidity. Each option presents a trade-off between short-term financial stability
and long-term growth potential, and Stanley must carefully consider
• Provides an incentive for customers to pay earlier, reducing the
the implications for SP's financial health and competitive position.
average collection period.

17/05/2024 Stanley Products Credit Policy 12

 Q3. What are the potential risks associated with each proposed alteration to SP's credit policy, such as
tightening credit standards or modifying credit terms? How might these risks impact the financial stability and
growth prospects of the company?

 Tightening Credit Standards:  Impact on Sales and Market Share:

i. Risk of Reduced Sales: Tightening credit standards may lead to a
decrease in sales volume as some potential customers may not meet the
new, stricter criteria.
ii. Impact on Growth: If sales decrease significantly, it could hinder the
company's growth prospects, particularly if competitors continue to
offer more lenient credit terms and attract customers that Stanley
Products now turns away.
iii. Loss of Market Share: Competitors with more relaxed credit policies
may gain market share, further impacting Stanley Products' growth
potential.
 Modifying Credit Terms:
i. Risk of Customer Dissatisfaction: Modifying credit terms, such as
shortening payment periods or increasing interest rates, may lead to
dissatisfaction among customers.
ii. Impact on Customer Relationships: Unhappy customers may seek
alternative suppliers, damaging long-term relationships and potentially
leading to lost business for Stanley Products.
iii. Cash Flow Impact: If customers struggle to meet new payment terms,
it could impact the company's cash flow, particularly if there is a delay
in receiving payments.
17/05/2024 Stanley Products Credit Policy
i. Risk of Reduced Sales Volume: If credit terms become less favorable,
some customers may reduce their purchases, impacting the company's
sales volume.
ii. Competitive Disadvantage: Competitors with more attractive credit
terms may gain a competitive advantage, potentially leading to a loss
of market share for Stanley Products.
iii. Long-term Growth Implications: A decline in sales and market share
can have long-term implications for the company's growth trajectory,
making it harder to achieve strategic objectives.
 Regulatory Compliance Risks:
i. Non-compliance Penalties: Changes to credit policies must comply
with relevant regulations. Failure to comply could result in penalties
or legal actions, impacting the company's financial stability and
reputation.
ii. Reputational Damage: Regulatory breaches can damage the
company's reputation, affecting customer trust and investor
confidence.
13
Q4. What are the implications of altering credit terms from net 30 to 3/10, 30 for SP's cash flow
management and working capital requirements? How might this impact the company's ability to
meet its short-term financial obligations and invest in future growth opportunities?

Implications of Altering Credit Terms from Net 30 to 3/10, 30 for Stanley Product:
• Improved Cash Flow: Offering a cash discount incentivizes customers to pay earlier, leading to faster cash inflows for
Stanley Products.
• Reduced Working Capital Requirements: Faster payments result in lower accounts receivable balances, reducing the
need for working capital to finance operations.
• Enhanced Liquidity: With quicker access to cash, Stanley Products can better manage day-to-day expenses, mitigate
financial risks, and seize unexpected opportunities.
• Potential Impact on Short-Term Obligations: If customers take advantage of the discount, Stanley Products may
experience a temporary decrease in accounts receivable, affecting the availability of funds for meeting short-term
obligations.
• Increased Ability to Invest: By freeing up cash through faster receivables turnover, Stanley Products can allocate more
resources towards investing in growth initiatives, such as research and development, marketing, or expansion into new
markets.

17/05/2024 Stanley Products Credit Policy 14

Q5. Determine the cost to SP of forgoing the cash discount assuming credit terms of: (a) 2/10, net 20; (b) 3/10,
net 30.

Cost to Stanley Products of Forgoing Cash Discount:

(a) Credit Terms: 2/10, net 20:
• Forgoing the cash discount means the full invoice amount is due within 20 days.
• The effective annual interest rate (EAR) for not taking the discount:
EAR = [(Discount % / (1 - Discount %)] * [(365 days / (Full payment days - Discount days)]
= [(2% / (1 - 2%)] * [(365 days / (20 days - 10 days)]
= [(0.02 / 0.98)] * (365 days / 10 days) ≈ 0.0408 * 36.5 ≈ 1.49%
The cost of forgoing the discount is approximately a 1.49% increase in the invoice amount on an annual basis.
(b) Credit Terms: 3/10, net 30:
• Forgoing the cash discount means the full invoice amount is due within 30 days.
• Calculate the effective annual interest rate (EAR) for not taking the discount:
EAR = [(Discount % / (1 - Discount %)] * [(365 days / (Full payment days - Discount days)]
= [(3% / (1 - 3%)] * [(365 days / (30 days - 10 days)]
= [(0.03 / 0.97)] * (365 days / 20 days) ≈ 0.0309 * 18.25 ≈ 0.565%
The cost of forgoing the discount is approximately a 0.565% increase in the invoice amount on an annual basis.

17/05/2024 Stanley Products Credit Policy 15

Q6. Evaluate Roberts's assertion that "it's clear you need to stiffen credit standards since your bad debt percentage
seems (quite) high for a firm in your line of business." (You may assume for the sake of argument that SP's bad debt
percentage is in fact quite high.)

Implications of Altering Credit Terms from Net 30 to 3/10, 30 for Stanley Product:
• Improved Cash Flow: Offering a cash discount incentivizes customers to pay earlier, leading to faster cash inflows for
Stanley Products.
• Reduced Working Capital Requirements: Faster payments result in lower accounts receivable balances, reducing the
need for working capital to finance operations.
• Enhanced Liquidity: With quicker access to cash, Stanley Products can better manage day-to-day expenses, mitigate
financial risks, and seize unexpected opportunities.
• Potential Impact on Short-Term Obligations: If customers take advantage of the discount, Stanley Products may
experience a temporary decrease in accounts receivable, affecting the availability of funds for meeting short-term
obligations.
• Increased Ability to Invest: By freeing up cash through faster receivables turnover, Stanley Products can allocate more
resources towards investing in growth initiatives, such as research and development, marketing, or expansion into new
markets.

17/05/2024 Stanley Products Credit Policy 16

Q7. What considerations should Stanley take into account when assessing the potential reaction of SP's competitors
to the proposed price discount and changes in credit terms? How might competitors adjust their strategies in
response, and what implications could this have for SP's market position and sales projections?

 Considerations for Assessing Competitors' Reaction:
 Market Dynamics: Evaluate the competitive landscape and the
behavior of key competitors in response to pricing and credit term
changes.
 Competitors' Financial Position: Consider competitors' financial
strength and flexibility to adjust pricing and credit terms in response
to market changes.
 Customer Relationships: Assess competitors' existing customer
relationships and their ability to retain customers in the face of
pricing and credit term adjustments.
 Product Differentiation: Analyze how competitors differentiate
their products or services and whether they may leverage this to
counter Stanley Product's initiatives.
 Historical Responses: Review past instances of pricing or credit
term adjustments by competitors to anticipate potential reactions.
 Potential Competitor Adjustments:
 Price Matching or Discounts: Competitors may respond by
matching or undercutting Stanley Product's prices to retain
customers.
 Flexible Credit Terms: Competitors could offer more favorable credit terms
to attract customers who may be deterred by Stanley Product's changes.
 Value-added Services: Competitors may emphasize additional services or
features to justify their pricing and differentiate from Stanley Products.
 Targeted Marketing Strategies: Competitors might increase marketing
efforts to highlight their advantages over Stanley Products in response to the
changes.
 Implications for Market Position and Sales Projections:
 Market Position: Increased competition could impact Stanley Product's
market position, potentially leading to loss of market share if competitors
respond aggressively.
 Sales Projections: Changes in competitor strategies may affect sales
projections, requiring adjustments based on evolving market dynamics.
 Customer Retention: Retaining existing customers may become more
challenging if competitors offer more attractive pricing or credit terms.
 Long-term Strategy: Stanley Products should consider the sustainability of
its pricing and credit term changes in light of potential competitor responses,
ensuring alignment with long-term strategic goals.

17/05/2024 Stanley Products Credit Policy 17

Q8. In considering the option of bringing in a partner for additional capital and managerial support, what criteria
should Stanley use to evaluate potential candidates? What are the potential benefits and drawbacks of this option
compared to the alternatives?

Criteria for evaluating potential partners: Potential drawbacks:

 Financial stability and capability to provide additional capital.  Loss of sole control and decision-making
 Complementary managerial skills and experience. authority.
 Alignment with Stanley's vision and values.  Conflict or disagreement in strategic direction
or operational decisions.
 Track record of successful partnerships or business ventures.
 Sharing of profits and ownership dilution.
 Compatibility in decision-making and strategic planning.
 Compatibility issues between Stanley and the
partner.
Potential benefits of bringing in a partner:  Potential for communication challenges or
 Access to additional capital for growth and expansion. misalignment of expectations.
 Sharing managerial responsibilities, allowing Stanley to focus on
technical aspects.
 Potential synergies and expertise brought by the partner.
 Mitigation of risks through shared decision-making and resources.

17/05/2024 Stanley Products Credit Policy 18

Q9. As Stanley noted, there are two changes: easier credit terms and stricter credit standards.
Which change is more likely to trigger a reaction from SP's competitors? Explain.
In judging the reaction of Stanley's competitors to the price discount, how relevant is the following information about the
average collection period in the industry? The median ACP is 44 days, and 25 percent of the industry firms have ACPs of
less than 33 days.

1. Which change is more likely to trigger a reaction from SP's competitors?

Stricter credit standards are more likely to trigger a reaction from SP's competitors. This is because while easier credit terms might
attract new customers to SP, stricter credit standards could potentially affect the customer base of SP's competitors by making it
more difficult for customers to obtain credit from them, thus prompting a competitive response.

2. How relevant is the following information about the average collection period in the industry in judging the reaction of
Stanley's competitors to the price discount?
The information about the average collection period in the industry, specifically the median ACP of 44 days and the fact that 25
percent of the industry firms have ACPs of less than 33 days, is highly relevant. It indicates that competitors in the industry may
have varying credit policies, some of which might align with or differ from SP's proposed changes. This knowledge helps in
understanding potential reactions from competitors, especially regarding their flexibility in offering discounts and managing
credit terms.

17/05/2024 Stanley Products Credit Policy 19

Q10. Complete Exhibit 4.

EXHIBIT 4
Worksheet to Evaluate the Credit Changes for 2016 (Year t+1) ($000s)
No Credit Changes With Changes Difference
Sales 1400.20 1540.22 140.02
Bad debt expense 18.20 7.70 -10.50
Discounts taken 0.00 32.34 32.34
Net sales 1382.00 1500.18 118.18
Variable cost 1050.20 1078.15 27.95
Fixed cost 252.00 252.00 0.00
Earnings before taxes 79.80 170.03 90.23
Taxes (40%) 31.90 68.01 36.11
Net income 47.90 102.02 54.12
Capital cost 35.00 12.17 -22.83
Gain (loss) 12.90 89.85 76.95

17/05/2024 Stanley Products Credit Policy 20

Conclusion & Key Takeaways

17/05/2024 Stanley Products Credit Policy 21

 Conclusion & Key Take Aways
Conclusion:
Stanley Products (SP) faces the challenge of financing its projected growth. After exploring various options, including bank financing
and altering credit terms, Stanley decides to focus on tightening credit standards and modifying credit terms to attract new customers
while potentially losing some due to tighter credit standards. These changes are expected to increase sales by 5%. However, the impact
on SP's competitiveness and potential reactions from competitors remain uncertain.
Key Takeaways:
 Growth projections necessitate external financing, posing a challenge due to limited capital resources.
 Bank financing options are limited and come with higher interest rates and stricter credit standards for small businesses like SP.
 Alternative options such as delaying trade discounts, improving credit terms, restricting growth, and bringing in a partner are
considered.
 Stanley opts for modifying credit terms and tightening credit standards to attract new customers and mitigate bad debt expenses.
 Sales projections are made based on assumptions about customer behavior and competitors' reactions, with some uncertainty
regarding the outcome.

17/05/2024 Stanley Products Credit Policy 22

Thank You!