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?© BrainMass Inc. brainmass.com October 24, 2018, 11:06 pm ad1c9bdddf
*** 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 ...
The solution answers the question(s) below.
Working Capital Management
A) Dan plans to use the preceding ratios as the starting point for discussions with SKI's operating executives. He wants everyone to think about the pros and cons of changing each type of current asset and how changes would interact to affect profits and EVA. Based on the data in the table, does SKI seem to be following a relaxed, moderate, or restricted working capital policy?
b) How can one distinguish between a relaxed but rational working capital policy and a situation where a firm simply has a lot of current asset because it is inefficient? Does SKI's working capital policy seem appropriate?
c) Calculate SKI's cash conversion cycle, assuming all calculations use a 360-day year.
d) What might SKI do to reduce its cash and securities without harming operation?
Q 23-3 What are the advantages of matching the maturities of assets and liabilities? What are the disadvantages?
Q 23-4 From the standpoint of the borrower, is long-term or short-term credit riskier? Explain. Would it ever make sense to borrow on a short-term basis if short-term rates were above long-term rates?
Q 23-5 If long-term credit exposes a borrower to less risk, why would people or firms ever borrow on a short-term basis?
Q 23-9 The availability of bank credit is often more important to a small firm than to a large one. Why?
Mini Case !
a) B&B tries to match the maturity of its assets and liabilities. Describe how B&B could adopt either a more aggressive or more conservative financing policy.
b) What are the advantages and disadvantages of using short-term credit as a source of financing?View Full Posting Details