1. Introduction Increasingly, we are seeing many firms from various industries allowing their customers to pay on credit. This action will inevitably have a direct implication on the financial statements of these firms, in terms of accounts receivables, allowance for bad debt and uncollectible debt expense. This is especially so when customers are unable to repay their debts. In this paper, we will examine the 2008 financial statement of four companies in the retail industry, namely Courts Singapore Private Limited, Dairy Farm International Holdings Private Limited, Isetan Singapore Private Limited and OSIM International Limited.
We will look at the amount of receivables of each company. In particular, their allowance for bad debts and bad debt expense in their financial statements. 2. About Courts Singapore Private Limited Headquartered in Singapore, Courts opened its first retail outlet in Singapore in 1974. It is one of the largest furniture, electronics and IT retailers in Southeast Asia. In line with its mission ‘To be the most customer oriented, profit focused retailer making inspirational home products easily affordable’, Courts is committed to offering the best home products at the right prices.
Courts started as a furniture retailer and subsequently started retailing electrical products in the 1980s and IT products in the late 1990s. Courts carries the largest selection of home furnishings, domestic appliances, home entertainment solutions and the latest digital technology. It also offers consumers a hassle-free in-house credit option, MAX Credit, to make consumers’ dream lifestyle more affordable. Courts currently has ten stores located island wide in Singapore. The company was listed in 1992 and became delisted in 2008. Courts,2010) 3. Comparison Of Companies Under Investigation GENERAL JOURNAL| DATE| DESCRIPTION| DEBIT| CREDIT| 2008 | | | | Dec| 31| Dr Allowance for Bad Debt| 16,019,000| | | | Cr Accounts Receivable| | 16,019,000| | | To write off bad debt| | | Dec | 31 | Dr Bad Debt Expense | 17,332,000 | | | | Cr Allowance for Bad Debt | | 17,332,000| | | To estimate bad debts for the period | | | Account Receivable 17,332,000 Bad Debt Expense 17,332,000 Begin Bal. 19,815,000 Allowance for Bad Debt 16,019,000 17,332,000 Ending Bal. 21,128,000
Before we compare Courts’ Cash Conversion Cycle with the other 3 companies in the retail industry, let us look at Courts Cash Conversion Cycle for the past 5 years (2004-2008) first. Courts Cash Conversion Cycle (5 Year Series) (Amount in Days)| 2004 | 2005 | 2006 | 2007 | 2008 | Average Collection Period (ACP)| 242. 09| 216. 67| 203. 08| 225. 57| 185. 44| Average Resident Period (ARP)| 50. 48| 46. 11| 40. 54| 56. 44| 46. 47| Average Payment Period (APP)| 36. 25| 34. 71| 31. 52| 48. 30| 45. 30| Cash Conversion Cycle (CCC) | 256. 32| 228. 07| 212. 09| 233. 70| 186. 1| Trends/observations Average collection period is on a decreasing trend from 2004 to 2008. Courts receivables level has been on a decreasing trend from 64. 1% of sales revenue in 2004 to 48. 4% in 2008. These evidences show that Courts have improved its credit policy. Courts has became more stringent in granting credit purchases for customers. With a pool of customers with better credit-rating, prompt payments of receivables can be ensured. However, there is a sudden increase of 10% from 2006 to 2007 and a sharp decrease by 17. 73% (40 days) from 2007 to 2008.
This may be due to the Courts’ introduction of “Courts Easy Access” internal credit policy in February 2007 which encouraged more sales via credit, which in turn resulted in increased receivables and a longer receivables collection period. The 2008 decline may be due to the global financial crisis causing people to hold back big ticket purchases from Courts, and thus reducing the amount of credit sales and receivables, causing the average collection period to improve. Average resident period is fairly consistent over 5 years, Inventory levels has been consistent at 10% of overall assets over the past 5 years.
This shows that Courts has a good inventory management system which consist of a good inventory monitoring system and a timely purchase order system. Average payment period has increased significantly in 2006 from 2007. This may be due to Courts renegotiating better contract terms with suppliers, giving Courts better payment terms by extending the repayment period. This is beneficial to Courts as it can then hold on to the cash longer(due to delayed payment of debts), thus maximising its investment potential. Cash Conversion Cycle improved as it decreased 27. 0% from 256. 32 days in 2004 to 186. 61 days in 2008. This is primarily due to a decrease of ACP by 23. 40% from 2004. A lower CCC would mean that the company has improved the efficiency of its operating cycle Now we look at Courts Cash Conversion Cycle compared with its competitors in the retail industry. Table of Cash Conversion Cycle for 2008 (Amount in Days)| Courts | Isetan| OSIM| Dairy Farm | Average Collection Period (ACP)| 185. 44| 17. 65| 22. 49| 1. 85| Average Resident Period (ARP)| 46. 47| 15. 79| 149. 75| 46. 4| Average Payment Period (APP)| 45. 30 | 72. 47| 47. 00| 79. 94| Cash Conversion Cycle (CCC) | 186. 61| (39. 03)| 125. 24| (31. 45) | Average Collection Period (Days’ Sales in Receivables) * Number of days needed to collect the average level of receivables Courts has the highest ACP of 185. 44 days while Dairy Farm has the lowest ACP of 1. 85 days. Courts takes the longest time to collect the average level of receivables. Courts sells a lot of big ticket items, thus have a much higher level of receivables to collect than the other retail companies.
It also has a wide-scale internal credit policy (initially called Courts Easy Access, and later called Home Club Max Credit) This scheme offers credit repayment schemes of up to 60 months (1800 days) and allows customers to pay fixed monthly installments. Thus it is normal to expect customers making use of those schemes, leading to account receivables taking a long time to be collected, thus explaining the highest ACP. Dairy Farm is the fastest at collecting its average level of receivables.
As the company is a retail business with a focus on consumer and durable goods (especially in supermarkets, hypermarkets, health and beauty stores and convenience stores), most of its sales are in cash, thus it has a very small level of receivables. The small amount of receivables also made it easier for the company to collect, thus explaining the lowest ACP. Average Resident Period (Days’ Inventory on hand) * Number of days needed to sell the average level of inventory OSIM has the highest ARP of 149. 75 days while Isetan has the lowest ARP of 15. 9 days. OSIM sells mainly healthcare-related electrical appliances, which are relatively slower-moving in terms of sales, thus remaining in warehouses and on display for a longer period of time. The global financial crisis in 2008 may have played a part in the resulting high ARP. Due to the financial downturn, the demand for healthcare-related electrical appliance will drop. As they’re considered as luxury goods to the average households, demand will drop while average household disposable income drop and credit market freezes.
Conversely, exercises and other cheaper alternatives become a more attractive substitute to the OSIM products. With the drop in demand for OSIM’s products, the inventory stays in stores for a longer period before they are sold, thus explaining the highest ARP. Isetan sells fashion and lifestyle products, which are generally faster-moving in sales. Thus inventory is sold off and replaced faster, thus explaining the lowest ARP. Courts has an ARP of 46. 47 days which is in-between OSIM and Isetan’s. This is because it sells mainly a mixture of electrical appliances and furniture.
The flow of the sales of such goods are definitely slower than that of fashion apparels from Isetan and is relatively faster than OSIM’s more specific health-related electrical appliances market. Average Payment Period (Days’ Payable Outstanding) * Number of days needed to pay its own bills (Accounts Payable) Isetan and Dairy Farm both have higher APP of 72. 47 and 79. 94 days respectively while Courts and OSIM both have lower APP of 45. 30 and 47. 00 days respectively. Isetan and Dairy Farm have APP averaging about 2. 5 months, taking the longest time to pay its accounts payable.
This might be due to the longer payment terms signed with their suppliers. Companies benefit by slowing down the payment of Accounts Payable to its suppliers because it will allow the company to hold on to its money for longer period, utilizing it for short-term investments like money market deposits or term deposits to increase investing revenue etc. Courts and OSIM have APP averaging 1. 5 months, taking the shortest time to pay its accounts payable. This might be due to the shorter payment terms signed with their suppliers.
With a low APP, the companies will not have the luxury of having extra money for other purposes as they need to pay its bills more quickly. Cash Conversion Cycle * Number of days needed to convert its activities requiring cash into cash returns (Tian Jie: can u edit the figures used to chart this graph and delete Dell? Also, is it possible to put in number of days on top or below each bar) Courts has high CCC due to a high ACP and a low ARP, while OSIM has high CCC due to a high ARP and a low APP. The data above shows that Courts and OSIM are the only two with positive CCC with Courts having the highest CCC of 186. 1 days. This means that Courts and OSIM need to wait longer for their investments to bear fruit, from the time when they invest in the production of the retail good to the point when the retail good is sold and money collected on account. The companies have more cash tied up in their core operation due to a longer time lapse between cash outlay and cash recovery. This will result in companies not having excess cash to invest in other activities. Isetan and Dairy Farm both have low APP and ARP but high APP, thus resulting in a negative CCC, with Isetan having the lowest CCC (-39. 03 days).
This shows that Isetan and Dairy Farm have more free cash for other uses like investing in other activities (e. g capital, infrastructure) This also means that there is a return in investment before the investment is being made. (Tian Jie pls elaborate this) According to the data, Courts seems to be performing badly compared to the rest of the companies, as it has the longest Cash Conversion Cycle. On the other hand, OSIM seems to be the best performing company. However, the data does not fully factor in the nature of the companies as these retail companies sell inherently different products which cater to different markets.
Therefore, it is not advisable to compare two companies from entirely different industries as they might have different business models. A better choice would be to compare Courts to Harvey Norman. Harvey Norman engages in the same retail industry as Courts, which is in the retail of consumer electronics and furniture. In addition, both companies utilities the net revenue model of accounting their revenue. (Tian Jie: need to elaborate more? ) (Amount in Days)| Courts | Harvey Norman| Average Collection Period (ACP)| 185. 44| 4. 91| Average Resident Period (ARP)| 46. 47| 6. 70| Average Payment Period (APP)| 45. 30 | 26. 47|
Cash Conversion Cycle (CCC) | 186. 61| (14. 86)| Comparison of Courts and Harvey Norman Cash Conversion Cycle Harvey Norman has a negative CCC of 14. 86, which is 13. 5 times less than the Cash Conversion Cycle of Courts. One of the reasons for this could be due to the high amount of credit that Courts allows. This can be seen through the difference in proportion of receivables to total assets between the two companies. The ratio for Courts is 0. 26, compared to Harvey Norman, which is just 0. 058. (Tian Jie: pls give reference here and put table in appendix) Another possible reason is the low turnover rate of inventory.
The ARP for Courts is 46. 47, while Harvey Norman has a much lower ARP of 6. 7 days. This means that Harvey Norman changes its inventory more frequently than Courts. This can mean two things, one is that Courts management have good business foresight which allows them to not refresh their inventory as frequently, and the other being that Courts struggle to sell off their inventories. Conclusion Are the Cash Conversion Cycle figures reasonable for the companies’ respective business models? Yes. [Elaborate] Appendix 1: Background of Companies
Brief background on Dairy Farm International Holdings Private Limited The story of Dairy Farm dates back to 19th century Hong Kong, when Scottish surgeon Sir Patrick Manson and five businessmen embarked on a venture to improve the health of the Hong Kong community by breeding imported cattle locally, and to ensure a daily supply of disease-free fresh milk at an affordable price – a challenging move as the pioneering herd had to adapt to Hong Kong’s sub-tropical climate. From such modest beginnings, Dairy Farm has expanded and reinvented itself over the decades to become one of Asia’s most dynamic and reputable companies.
Today, Dairy Farm is primarily into retailing, with a focus on supermarkets, hypermarkets, health and beauty stores, convenience stores, home furnishings stores and restaurants. The Group commands a leadership position in many key Asian markets and has upheld its principles for quality products, business integrity and commitment to the community. (Dairy Farm, 2010) Brief background on Isetan Singapore Private Limited Isetan Company Limited is one of Japan’s leading department store companies, particularly noted for its merchandising strength in the area of high-fashion apparel for women in their 20s and 30s.
It has established itself as a fashion leader through sophisticated consumer research and extensive introduction of merchandise from abroad, both well-known designer labels and brands developed exclusively for Isetan. Since its flagship store on 31 January 1971, the company operates four stores in Singapore, and a stand-alone Mango boutique, strategically located across the island catering to a wide spectrum of customers. (Isetan, 2010) Brief background on OSIM International Limited OSIM International Limited is the global leader in branded healthy lifestyle products.
Listed in the Singapore Stock Exchange, OSIM has over 28 years of experience and uncompromising dedication in developing innovative and reliable healthy lifestyle products. OSIM is the name you can trust for a healthier lifestyle and overall well-being. (OSIM, 2010) Appendix 2 Amount (‘000 ) | 2004 | 2005 | 2006 | 2007 | 2008 | Sales Revenue | 207,004 | 239,907 | 308,292 | 303,392 | 346,015 | Trade Receivables | 132,788 | 152,042 | 191,014 | 183,973 | 167,622 | Ratio of Trade Receivable to Sales Revenue | 64. 1%| 63. 4%| 62. 0%| 60. 6%| 48. 4%| Bibliography Ghorpade, J. (2000).
Managing Five Paradoxes of 360-Degree Feedback. Academy of Management , 141-150. Gilley, J. W. , & Boughton, N. W. (1996). Stop Managing, Start Coaching! How Performance Coaching Can Enhance Commitment and Improve Productivity. Dubuque: Times Mirror Higher Education Group. March J G, G. H. (1958). Organizations. New York. Mazur, J. E. (2006). Learning and Behavior, 6th Edition. Pearson. Mitterer, D. C. (2007). Introduction to Psychology. Belmont, USA: Thomson Learning, Inc. ——————————————– [ 1 ]. See Appendix 2 a table showing Courts Inventory levels