CAT / FIA FMA Syllabus F. Performance Measurement - Measuring Efficiency - Notes ^{4 / 15}

Measures of activity include:

1. Accounts receivable collection period

2. Accounts payable payment period

3. Inventory  turnover period

Accounts receivable collection period

• This is a measure of management’s efficiency and is expressed as:

  Receivables 
  --------------         x 365 days
  Sales
                    
  This is an indicator of the effectiveness of the company’s credit control systems and policy.

Accounts payable payment period

• The creditor days is a measure of how much credit, on average, is taken from suppliers. It is expressed as:

  Trade Payables   
  ---------------------    x 365 days
  Purchases

  This ratio is an aid to assessing company liquidity, as an increase in creditor days is often a sign of inadequate working capital control.

Inventory turnover period

• This is expressed as: 

  Inventory   
  --------------------  x 365 days
  Cost of sales

The holding period may increase because of:

1. Build-up of inventory levels as a result of increased capacity following expansion of non-current assets.

2. Increasing inventory levels in response to increased demand for product.

Illustration

Receivables $10,000
Inventory $15,000
Payables $12,000
Credit sales $30,000
COS $20,000

What are the receivables days?

10,000/30,000 * 365 days = 121.7 days

What are the payables days?

12,000/20,000 * 365 days = 219 days

What the inventory days?

15,000/20,000 * 365 days = 273.8 days 

Looks like the company is not managing its working capital well!