ANALYSIS
Analysis Net Sales and Receivables, Inventory, DSO and Liquidity
The chart shows that net sales of the company are less than receivables for the entire period. This indicates that there were outstanding receivables at the start of the financial year. Thus, the outstanding amount at the start of every month plus the credit sales made during the month exceeds net sales. This happens because the company takes almost two months to collect receivables. The number of days taken to collect receivables is illustrated below.
The DSO for the entire period considered is above 60 days in all the months except in May where it fell to around 55. On the other hand, the payable days range from 25 days to 41 days. This shows that the company takes fewer days to settle its current liabilities than it takes to collect its receivables. Therefore, the company may fail to meet its current obligation if it sells all its stock on credit. However, if a bigger percentage of stock is sold in cash than in credit the company may will its current obligations.
The graph shows that the company’s DSO has a relatively increasing trend. In March the DSO is at 140 while in August it is at 40. This shows that the enterprise does not have a strict credit policy. This may lead to increased provision for bad and doubtful debts. The lack of strict credit policy also affects company’s liquidity.
The graph shows that payables of the company can be settled by less that 20% of the net sales. Thus, the company can meet its current obligation without arranging for bank overdraft.
The inventory is more than net sales in almost all the months. This graph shows that the company is less likely to face stock out costs.
Conclusion
The company takes more time to collect receivables than to settle payables. This means that it cannot rely on its receivables to meet current liabilities. However, the company may not face any liquidity problems because some stock is sold in cash and the payables are less than accounts receivable. Moreover, the company's credit policy credit policy is not clear for DSO ranges from 40 days to 140 days. The management should come up with a clear credit policy. Lastly, the company is less likely to face any stock out costs.
