Question

Based on the interim results below for Cabben Fashion Limited, it has shown a favourable receivables turnover ratio. Discuss 4 possible strategies that Cabben Fashion Limited may have implemented to achieve an improved receivable turnover from 135 days to 91 days.              

Cabbeen Fashion Limited
(incorporated in the Cayman Islands with limited liability)

Cabbeen announces 2018 interim results
Profit for the period increased by 24.1% to RMB109.1 million
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(1 August 2018, Hong Kong) Cabbeen Fashion Limited ("Cabbeen" or the "Company", including subsidiaries, the "Group", HKSE stock code: 2030), one of the leading menswear designer brands in China, announces its results for the six months ended 30 June 2018 (the "period").

Results and Operation Highlights:

Financial Highlights

Revenue increased by 37.5% to RMB 558.1 million.

Gross profit increased by 23.0% to RMB 267.3 million, with gross profit margin at 47.9%.

Profit for the period increased by 24.1% to RMB109.1 million, with net profit margin at 19.6%.

Basic earnings per share were RMB 0.1640, up 31.3% from the same period in 2017.

Resolved to declare an interim dividend of 13.2 HK cents per share.

Encouraging results from e-commerce business

Revenue from online shops increased 66.9% from the same period in 2017 to RMB 214.0 million.

The number of membership and fan accounts on WeChat as of 30 June 2018 were 3,119,000 (30 June 2017: 1,944,000), of which 360,000 members (30 June 2017: 337,000) made purchases amounted to RMB 788.6 million (30 June 2017: RMB 681.6 million).

Improved overall inventory

Up to 30 June 2018, sell-through rate of the Group's 2017 collections was 81.5% and 2018 spring/summer collections was 56.0%.

Average inventory turnover days improved to 200 days from 296 days for the same period in 2017.

Further enhanced financial robustness

Cashflow from operating activities improved to net inflow of RMB48 million from net cash outflow during the first half of 2017.

Average turnover days of trade and bills receivables improved to 91 days from 135 days for the first half of 2017.

Cash and cash equivalents, pledged deposits, financial assets and time deposits with initial terms of over three months totaled RMB 994.9 million, up from RMB945.6 million on 31 December 2017.

Net debt position on 30 June 2018 improved to RMB 25.3 million, down from RMB 153.5 million on 31 December 2017.

Answer 1

Four possible strategies that Cabben Fashion Limited may have implemented to achieve an improved receivable turnover from 135 days to 91 days are discussed below:

1. Tightening of its credit policy – This strategy would have led to lowering of the credit period that the company allows to its debtors and this, in turn, helps is speeding the collection process.

2. Providing discounts on early payments – This strategy would have encouraged the debtors to pay early and avail the cash discounts being offered by Cabben on early payments.

3. Constant monitoring and follow up - Cabben would have engaged its sales force in collecting as well and the constant follow up with the debtors would have reduced the amount due from them.

4. Not providing credit on small orders – Cabben, like many fashion and apparel companies, would have provided credit only on large orders and orders from regular buyers. Thus by stopping credit to first time buyers and for small orders the company was able to reduce its accounts receivable and hence its receivable turnover in days improved.