Question

A company manufactures beach umbrellas and sells to store in high summer traffic sots (ex. Pentiction ,Kelowna). Ownership has approached you to invest in their business. You notice that receivables turnover has increased from 33 days to 51 dats over a four-month period. if you were interviewing managment, what questions would you ask them to determine if this represents a potential problem?

Answer 1

Solution -

An increase in the receivable turnover days can occur due to the following reasons -

• A poor collection system of the company
• A slowdown in sales and the market. An off-season time.
• A problem with the supplies which are not as pe standards and hence there were replacements that caused this delay in payments
• Industry standards for credit period were different and hence the purchasers have course corrected their behavior

To assess if this is a problem I would ask the management the following questions -

1. In the last four months how many return inventory have been accounted

2. Has the sales gone down in the last four months in compared to the previous year.

3. What was the receivable turnover in the same period last year

The above questions would help me to judge if the supplies were as per standards, if there is any slowdown in the industry or if the business is affected by the season. If all the answers do not provide the root cause then the only way would be to conduct a market analysis on the credit behavior and also analyse if the purchaser is facing some internal or external issues independent of the industry or supplier company which the management would obviously be unaware of. Even then a direct question in such circumstances would be in order to understand how aware the management is.