Question

Question 4: Following are the values for US. Apparel Limited: Company’s Ratio Industry Average Days Sales Outstanding 45 days 52 days Credit Terms 50 days 60 days a. Analyze the DSO of the company internally. b. Analyze the DSO of the company externally. What advice will you give to the competitor firm (consider industry average value)?

Answer 1

Days Sales Ratio (DSO)

A days sales outstanding is the key for the management to analysis the accounts receivables. it is consists of two variables:

The average payment period granted to the customer due to the trade negotiation

The average number of days for the delayed payment and it is based on the debt collection.

The DSO has direct relation with the working capital requirements (WCR)., CASH FLOW AND TO THE OVERALL RISK. it is ti be observed that lower the DSO the lower is the WCR and result to improvement in the cash flow and also increase the profitability of the company and if the DSO is high then it will direct impact upon the WCR , it will also increases which result to more demand for the cash flow and impact upon the profitability of the company. so DSO is better to be lower.

DSO is calculated by dividing the average revenue to the sale and multiply to the number of days. lower the DSO is better for the firm theses are the points to be considered for the betterment of DSO of the company

-its better for credit period to be shorter

-better to include the down payment concept and the rest is available for the shorter period for better and fast recovery

-for faster recovery from the credit sale it is better to make dispute manage,net and settled the matters quickly

-better to always put offer for discount for fast recovery

-better recovery management on the due date

As per the requirement company ratio is 45 days while industry ratio for the DSO is 52 days so here the internal system of the company is strong enough to recover the amount very quickly compared to the industry norms

Also for the credit terms company os ahead company to the industry that is 50 days recovery period an it is 60 days for the industry so here also credit policy is considered to be good and all effort to be taken to recover fast and betterment of management regarding cash flow

DSO position can be improved by the following steps;

-Preparing automatic invoice

-Reduce error while preparing invoices

-Choice of payment is easy for the customer for fast recovery of te collection from the client

-In order to improve the position externally following points to be considered:

-Always focus on the better client with the less bad debt chance

-Always in order to prompt payment net 30 with discount offer make fast recovery of the amount

-More discount offer to those customer whose track record is better and more chance to improve the credit recovery and better collection with the minimum of days and cash flow is better to improve more on the future planning and also more recovery at faster rate make less provision for bad debts and less chance to bad debt of the company by improving the cash flow position of the firms.