How would a shift from a tight credit policy to a relaxed policy be likely to affect a firm’s cash budget?

Explanation

Relaxed credit policy refers to the credit policy which holds a relatively larger amount of current assets such as cash, marketable securities, and inventories. This policy offers higher discounts and longer credit periods which leads to an increase in sales of the firm.
 
Tight credit policy refers to the credit policy which holds a minimal amount of current assets such as cash, marketable securities, and inventories. This policy offers smaller discounts and shorter credit periods which leads to a decrease in sales of the firm.
 
The cash budget would be decreased if the firm will shift from a tight credit policy to a relaxed credit policy. Since under the relaxed credit policy the firm offers higher discounts, therefore the receipts side of the cash budget would be adjusted according to the reduction in the balance of amount received.
Moreover, under relaxed policy the company would call for a longer credit period and looser collection policy which would  increase the sales of the company. The more sales means the higher chances of default in payment and hence increase in bad debts of the company.

Verified Answer

The shift from a tight credit policy to a relaxed policy will reduce the receivable account balance from the receipt side of the cash budget. Moreover, it will also affect the amount of bad debts of the company.