Management of accounts receivable is an intricate process that follows some distinct steps. First, a company has to determine the right customer extend credit. This can be achieved by reviewing the credit rating of a customer. Secondly, the management should come up with a payment period. Working capital requirements should be taken into account when coming up with the credit terms. Third, there should be close monitoring of the collections.
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Further, the liquidity of the receivables should be reviewed from time to time. Finally, a company can quicken the conversion of accounts receivable to cash when needed. This can be done when there are cash flow problems (Horner, 2013). The relationship between cash collections, sales, and accounts receivable is vital and should be closely supervised. This is because there is a direct association between sales and accounts receivable.
For instance, an increase in sales should automatically lead to a proportionate growth in accounts receivable. If the two do not grow in a proportionate manner, then it is a sign of an underlying problem. For instance, if the accounts receivable are growing faster than sales, then it can be an indication that the company is facing difficulties in collecting amounts due from customers. Accounts receivable turnover and average collection period ratios are often used to measure the liquidity of an entity. This paper seeks to carry out a comparative analysis of the management of accounts receivable for VF Corporation and Columbia Sportswear Company. Accounts receivable turnover and average collection period ratios will be used to perform the analysis.
Accounts Receivable Turnover
This ratio is arrived at through the division of net credit sales and average net accounts receivable (Kimmel, Weygandt, & Kieso, 2016). It gives information on the number of times a company collects amounts due from companies and individuals. A higher value of the ratio is often preferred because it signifies that the company is more efficient in the collection of accounts receivable. The calculation for accounts receivable turnover and average collection period is presented in the attached excel file.
The value of net sales for VF Corporation was $12,154,784 thousand in 2014. The net accounts receivable balances were $1,276,224 thousand and $1,360,443 thousand in 2014 and 2013, respectively. It can be observed that there was a 6.2% drop in the net accounts receivable balance in 2014. The estimated value of accounts receivable turnover is 9.22 times. On the other hand, Columbia Sportswear Company had a net sales amounting to $2,100,590 thousand in 2014.
The net accounts receivable for the years 2014 and 2013 were $344,390 thousand and $306,878 thousand, respectively. The net accounts receivable rose by 12.22% in the year 2014. The estimated value of accounts receivable turnover is 6.45 times. A comparison of the accounts receivable turnover ratio for the two companies shows that Columbia Sportswear Company had a lower value than VF Corporation. This implies that within a year, Columbia Sportswear Company collects amounts due from customers slower than VF Corporation.
Average Collection Period
This ratio is often analyzed together with the accounts receivable turnover ratio because they are used to measure the efficiency of credit and collection policies for an entity. The average collection period is arrived at through the division of the number of days in a financial year (365) by accounts receivable turnover (Goyal & Goyal, 2013). It gives information on the duration that accounts receivable are outstanding. The estimated average collection period for VF Corporation is 39.59 days, while for Columbia Sportswear Company is 56.58 days.
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The values show that it takes VF Corporation 39.59 days to collect the accounts receivable. In the case of Columbia Sportswear Company, the accounts receivable remained outstanding for 56.58 days. This implies that amounts due from customers in VF Corporation remained outstanding for a shorter period than in Columbia Sportswear Company (Marshall, McManus, & Viele, 2014).
A comparison of the performance of the two companies shows that VF Corporation is more efficient in the management of accounts receivable than Columbia Sportswear Company. This can be explained by the high value of accounts receivable turnover and the low value of the average collection period. The ratios indicate that VF Corporation is more liquid than Columbia Sportswear Company because it can turn the receivables into cash quickly. It also signifies that Columbia Sportswear Company is likely to face difficulties in paying its short-term obligations.
Therefore, the company may require external financing to meet the cash shortage. The two ratios are just, but an indicator of how quickly accounts receivable can be converted into cash. Thus, they can be ambiguous when analyzing the overall management of accounts receivable. The results of accounts receivable turnover and average collection period need to be interpreted with a lot of caution because they depend on the credit policy. For instance, a company with a longer credit period is likely to have unfavorable ratios as compared with a company that has a shorter credit period. Further, the net sales for VF Corporation are about six times that of Columbia Sportswear Company.
A large corporation such as VF Corporation encourages customers to use their credit cards when making purchases so that they can earn returns from high-interest rates. Further, if a company sells its accounts receivable, then it is likely to appear more efficient in the management of accounts receivable than a company that does not. This explains why interpreting the two ratios requires a holistic review of a company’s practice and policies.
Goyal, V. K., & Goyal, R. (2013). Financial accounting (4th ed.). New Delhi, India: PHI Learning Private Limited.
Horner, D. (2013). Accounting for non-accountants (9th ed.). Philadelphia, PA: Kogan Page Limited.
Kimmel, P. D., Weygandt, J. J., & Kieso, D. E. (2016). Financial accounting: tools for business decision making (8th ed.). New Jersey, NJ: John Wiley & Sons, Inc.
Marshall, D. H., McManus, W. W., & Viele, D. F. (2014). Accounting: What the numbers mean (10th ed.). New York, NY: McGraw-Hill/Irwin.