What could be a potential reason for XYZ Ltd to lengthen its payment terms?

Lengthening payment terms can enhance customer loyalty, as it makes purchasing from a company like XYZ Ltd more appealing to customers. When customers are given more time to pay for goods or services, it can alleviate their cash flow pressures, allowing them to manage their finances more effectively. This flexibility can lead to a stronger relationship between the company and its customers, as clients may appreciate the trust placed in them and feel more inclined to continue business with the company.

While the other options may present related scenarios in which a company might operate, none directly establish a clear incentive for lengthening payment terms in the context of fostering loyalty. For instance, an increase in operating costs may necessitate tighter cash flow management rather than more lenient payment terms. Similarly, a reduction in sales volume might lead a company to shorten payment terms to improve cash inflow, rather than extending them. Improvement in inventory turnover relates to how quickly a company sells its stock and does not inherently connect to the strategy of adjusting payment terms with customers. Therefore, the potential to increase customer loyalty stands out as a relevant and strategic reason for lengthening payment terms.