Question

Kleen-Up Company has a receivables turnover ratio of 9.2 for the current year, and 10.7 for the prior year. Based on these ratios, management decides to increase the late payment charge imposed on clients when bills are not paid on time. Why did Kleen-Up make this change?

Answer 1

Kleen-Up Company increased the late payment charge to improve their cash flow and incentivize clients to pay on time due to a decrease in their receivables turnover ratio.

Step-by-step explanation:

Kleen-Up Company decided to increase the late payment charge imposed on clients because their receivables turnover ratio has decreased. The receivables turnover ratio is a financial metric that measures how quickly a company collects payments from its customers. A lower ratio indicates that it takes longer for the company to collect payments, suggesting potential issues with late payments or customers delaying payment. By increasing the late payment charge, Kleen-Up Company aims to incentivize clients to pay on time and improve their cash flow.