Question

1. You are a financial analyst and are comparing financial ratios of two competing companies in the consumer packaged goods sector: Kellogg’s company and General Mills. The 2018 turnover ratios for the two companies are summarized in the following table:

	K	G
Days sales outstanding	37.24	36.11
Days inventory outstanding	52.72	55.32
Days payable outstanding	97.16	86.11

By comparison, which company has better cash conversion cycle? What conclusions do you get regarding the two companies’ management in accounts receivable, inventory and accounts payable? What suggestions you would make to improve their management in these three aspects respectively?

Answer 1

Cash conversion cycle: -

The cash conversion cycle is a tool that expresses the time [measured in days] it takes for a company to convert its investments in inventory and other resources into cash flows from sales.

In the given case, when comparing the ratios of Kelloggs and General Mills; -

The following observations/conclusions are: -

Kelloggs receivable and inventory is 37.24 and 52.72 and while General is 36.11 and 55,32 which means kelloggs is able to sale more because it has higher receivable than General. Moreover, Kelloggs inventory level is 52.72 as compared to General (55.32) which indicates kelloggs purchasing and ordering inventory is as per their needs and have studied the market demand while General inventory level is 55.33 slighty higher in comparison to Kelloggs and more gap would be found if we see the sale levels as well. kelloggs planning must have led to lower working capital requirement as compared to General. Hence, interest cost is saved in Kelloggs while General had to pay more interest as they a have not planned well.

However, Kelloggs Payable is way higher in comparison to General's payable. General operating cash flow must be higher than Kelloggs as General has lower cash outflows.

Suggestions:-

Hence, Kelloggs have to ascertain and analyse their payables and decide if any avoidable payables are their or not and correct it accordingly, so that payables ratio improve.

General should increase their sales as they have more inventory by spending on advertisement or buy as per market demand only so that working capital does't get blocked and use that saved working capital for other purpose or paying off any loan.