Question

To encourage a customer to pay its bills on time or early, a firm will often offer:

a) Discounts
b) Credit limit increase
c) Extended payment terms
d) Higher product prices

Answer 1

The correct answer is (a) Discounts.

Step-by-step explanation:

To encourage a customer to pay their bills on time or early, a firm will often offer discounts. These discounts can be in the form of a percentage reduction on the total amount owed or a cash discount for early payment. By providing an incentive to pay early, the firm can improve its cash flow and reduce the risk of bad debt.

Option b) credit limit increase and option c) extended payment terms are not typically offered to encourage timely or early payment. They are more related to extending additional credit or providing more flexible payment options to the customer. Option d) higher product prices would not encourage timely or early payment; it would likely have the opposite effect.

Answer 2

To encourage on-time or early bill payments, firms mainly offer discounts as incentives. Other measures like credit limit increases, extended payment terms, or higher prices do not encourage early payments. Charging late fees or daily charges are punitive measures that also encourage prompt payment.

Step-by-step explanation:

To encourage a customer to pay its bills on time or early, a firm will often offer discounts. This strategy serves as an incentive for customers to settle their bills promptly to take advantage of the reduced payment amount. It aligns with the principle of financial management where firms aim to maintain optimal cash flows and reduce the risk associated with late or non-payments. Offering a credit limit increase, extended payment terms, or higher product prices would not typically serve as incentives for early payment; in fact, higher prices might deter prompt payment.

Businesses may also use other strategies like charging late fees or applying daily charges to encourage timely payments. For instance, as per the information provided, a credit card company might charge a $10 fee when a payment is late and then $5 a day for each day the payment remains unpaid. This punitive approach is designed to discourage late payments and encourage customers to prioritize their financial obligations to the creditor.