A Research Report On The Economy Of A Relaxed Asset Usage Policy

One assumption that should be clearly analyzed is that the collection period is of 30 days net. Not always customers have the ability and willingness to pay off their debts in 30 days, some may take more time, and some could incur in bad debt.

Total asset turnover : This ratio measures the efficiency of a company’s use of its assets

This also would cause their average collection period to become 0, because they no longer need to collect credit payment from customers. Only a small percentage of the company’s sales have customers that buy for resale purposes, the majority sales are cash retail.

The days sales outstanding (DSO) measures the average number of days it takes a company to collect on its debts after a sale is made.

J reflects department store chain. This industry is a retail business; therefore, there is a large amount of inventories. This industry also has high accounts receivable because usually customers pay with credit cards which are billed at the end of the month. However, sometimes, customers forget to pay their bills on time, and the bills are brought to next month. Therefore, the collection period is approximately 2 months.

Allow a 30-day grace period on all accounts receivable overdue at the end of the year. As these accounts will no longer be overdue, the company will not need an allowance for overdue accounts.

Tighten up collection of receivables so that receivables account for less than 19% of Sales (1985). Pursue more aggressive strategy of collections;

Return on assets ratio declined in 2010. This is due to increased total assets in 2010 due to company's acquisition of assets. In 2011, the company had a higher return on equity, which indicates that Lowe’s was able to generate more profit from the money that shareholder invested. The sales generated relative to total assets decreased in 2010, mainly due to reduced sales in 2009 coupled with increased total assets. Fixed asset turnover has been relatively good for Lowes. The ratio indicates how well the company is able to put fixed assets to use in generating sales. Current ratio has improved over past three years indicating a strong trend for the company in its ability to pay its current liabilities with current assets. The long-term debt forms a major part of company's financing. The company reviews its

With this company the inventory management ratios further indicate that there may be an issue with inventory and inventory controls. The inventory turnover ratio is lower than the industry average and the days’ sales in inventory are high. A company wants to turn inventory quickly to reduce storage costs, and

11. Accounts receivable turnover and days sales in accounts receivable for the last three years:

d) Does the DSO indicate that the firm’s customers have changed their payment behavior from the first to second quarter? Is DSO a good management tool in this situation? If not, why not?

Accounts receivable turnover is the second method by which a company’s trade receivables’ liquidity can be evaluated (Gibson, 2011). Žager et al. (2012) noted turnover ratios should be as high as possible as this indicates a firm’s ability to convert its assets more often. 3M’s accounts receivable turnover for years 2007 and 2008 is shown in Exhibit 2. In 2007, 3M turned its accounts receivable over 7.12 times and 7.70 times in 2008. This calculates into a turnover of its accounts receivable every 51.28 days in 2007 and 47.38 days in 2008. The increase in accounts receivable turnover times per year (decrease in number of days to turnover accounts receivables) from 2007 to 2008 is a positive trend for 3M. It suggests, along with the prior calculation, the management of receivables is likely to be improving in efficiency.

The existing policies being followed by Dakota regarding Accounts receivables are a major issue, which is affecting its payment of working capital line of credit (@10%). Customer A pays its bill within 30 days, whereas B takes up 90 days or more. Dakota can achieve sufficient liquidity, if it tightens its credit policy.

Many organizations have maximized the use of cash on hand by effective cash management techniques and the use of short-term financing. This paper will discuss various cash management techniques and short-term financing methods used by organizations.

Payables deferral period (PDP) = Average accounts payable / Cost of goods sold per day