Which ratios would explain whether a firm's customers pay more or less promptly than those of its competitors? Which ones would suggest that a firm should tighten or loosen its credit policy?
Is there any reason to think that a firm may be holding too much receivables? If so, how would that affect EVA and ROE?
*** If the company reduces its receivables without adversely affecting sales, what effect should this have on the company's cash position (1) in the short run and (2) in the long run? ***
Short run: Cash will increase as inventory purchases decline as receivables are reducued.
Long run: Company is likely to take steps to reduce its cash holdings and increase its EVA.
*** Which ratios would explain whether a firm's customers pay more or less promptly than those of its competitors? ***
1) A/R Turnover which is:
Net Credit Sales/Average Net A/R
This measures the ability to collect cash from credit customers
2) Days' sales in receivables which is:
Average Net A/R / One Day's Sales
3) A measure of the average number of days that a company takes to collect revenue after a sale has been made. A low DSO number means that it takes a company fewer days to collect its accounts receivable. A high DSO number shows that a company is selling its product to customers on credit and taking longer to collect money.
Days sales outstanding is calculated as:
AR/Totalal Credit Sales (# of Days)
This shows how many days sales remain in A/R -- how many days it takes to collect the average level of receivables.
Due to the high importance of cash in running a business, it is in a company's best interest to collect outstanding receivables as quickly as possible. By quickly turning sales into cash, a company has the chance to put the cash to use again - ideally, to reinvest and make more sales. The DSO can be used to determine whether a company is trying to ...
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