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UofP - MBA550 - DQs - Week One - 04-24-06

UofP - MBA550 - DQs - Week One - 04-24-06 - Week 1 DQ#1...

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Week 1 DQ #1 Synthesis of Content (Due Wed) Complete your reading of the textbook and run the Lawrence Sports Simulation before you answer this question. Based on your reading in the text chapters and articles for this week, select two concepts to explain to the class. You may not select a concept someone else has already discussed. Explain the following to your peers for each concept: Define the concept using at least one citation from the text Explain the importance and relevance of the concept to the week one scenario Use the concept to define an issue or an opportunity in the scenario Lawrence Sports Some concepts include: financial planning, financial statements, all the different ratios, working capital, net working capital, accounts receivable, inventory management, terms of sale, promise to pay, credit decisions, maximizing profit, mergers and acquisitions, value of vertical integration, etc. Concept One Financial Ratios—Liquidity and Efficiency Ratios Liquidity Ratios Liquidity ratios are helpful for short-term creditors/suppliers and bankers; however, they are also important to financial managers who must meet obligations to suppliers of credit. Furthermore, a complete liquidity ratio analysis can help uncover weaknesses in the financial position of a business. Basic Defense Interval (Cash + Receivables + Marketable Securities) = Basic Defense Interval (Operating Expenses + Interest + Income Taxes) / 365 What if all of a company’s revenues were to suddenly cease? The Basic Defense Interval would help determine the number of days the company can cover cash expenses without the aid of additional financing. Receivables Turnover Total Credit Sales = Receivables Turnover Ratio Average Receivables Owing Another indicator of liquidity, Receivables Turnover Ratio can also indicate management's efficiency in employing those funds invested in receivables. Net credit sales, while preferable, may be replaced in the formula with net total sales for an industry-wide comparison. Note: Closely monitoring this ratio on a weekly, monthly, or quarterly basis can quickly underscore any change in collections. Average Collection Period
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(Accounts + Notes Receivable) = Average Collection Period (Annual Net Credit Sales) / 365 The Average Collection Period (ACP) is another litmus test for the quality of your receivables business, giving you the average length of the collection period. As a rule, outstanding receivables should not exceed credit terms by 10-15 days. If a company allows various types of credit transactions—such as a retail outlet selling both on open credit and installment—then the ACP must be calculated separately for each category. Note: Discounted notes which create contingent liabilities must be added back into receivables.
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