Answer to Question #293207 in Finance for radhika

Question

Mr.Branganza, the CEO of ABC Ltd is carrying out a review of the company’s financial

performance for the year ended along with his functional managers. While reviewing

various indicators, he comes across one of the indicators as Receivable Turnover ratio

which shows as 4 for the current year as against 4.5 in the previous year. He turns

around to his CFO and asks” What would this mean in term of the collection cycle and

the number of days. Are we doing better or worse compared to the previous year? “What

should be CFO’s response?

Answer 1

The CFO should respond that they are not doing well because it shows they are collecting the debts 4 times as compared to the previous year and in terms of days it shows that debtors are paying their debts after 91.25 days as compared to 81.11 days for the previous year.