Agriculture Reference
In-Depth Information
The rate of inventory turnover indicates how successfully working capital has been
managed. If capital is being tied up in inventory, a higher margin will be required on
sales, because too much stock is on hand. Poor inventory management can also add a
severe burden, interest expense, if short-term fi nancing at a high rate of interest is being
used to fi nance the investment in inventory. Alternatively, a high rate of inventory turn-
over could indicate a lost opportunity for sales because of out-of-stock conditions or
inability to meet delivery requirements. Agribusiness managers must also consider dis-
counts for early delivery and match these against current interest rates. If BF&G has
storage facilities for fertilizer and the discount received from a supplier is greater than
its interest cost, profi t can be enhanced by adding to inventory levels.
Days sales in accounts receivable ratio
:
accounts receivable divided by net sales, and the
result multiplied by 360 days
. Another measure of effi ciency is found in the average
collection period of accounts receivable. An extended period for collection of accounts
receivable could indicate that profi ts might be reduced because of added collection
costs, interest on funds needed to support the accounts, and bad-debt losses. On the
other hand, too low a fi gure could indicate that an overly strict credit policy was causing
lost sales. Two important criteria should be used; generally, the calculated collection
period (1) should match that of others in the industry, and (2) should be at least equal to
the time extended by suppliers or vendors of the fi rm. This important area can be moni-
tored by means of the
days sales in accounts receivable ratio
:
(
)
×
Accounts Receivable
/
Net Sales
36 days
0
=
Days Sales in Acc
ounts Receivable
(14)
(
)
×=
om Balance Sheet d Income Statement a
$,
1 6
00 000
,
/$ ,
13 41
0 000
,
36
0
42 95 days
.
(
)
Fr
,;
,
A fi rm's credit policy and standing with creditors, as well as changes or trends, should
be indicators of effi ciency in managing working capital. One of the best rules of
thumb in relation to accounts receivable is that the collection period should not exceed
the regular payment period by more than one-third. If, for example, the credit policy
states that accounts are due in 30 days, the calculated collection period (days sales
in accounts receivables) should not exceed 40 days. In the case of BF&G, they are
slightly over the 40-day guideline and should evaluate the collection of their accounts
receivable.
Caution must be used in evaluating the receivables ratio, because accounts receivable
may vary from time to time or due to seasonally in a fi rm because of the nature of its
business or general economic conditions, and these factors should always be taken into
consideration when interpreting the ratio.
To aid the manager in monitoring accounts receivable the following measures can also
be used.
Aging accounts receivable
:
reporting accounts receivable on a monthly basis in accord-
ance with the number of days since the accounts receivable was charged to the
customer
. The most important tool in monitoring a credit program and accounts
receivable is the monthly aging of accounts receivable. Each account from the ledger is
