5.3 ANALYZING THE QUALITY OF RECEIVABLES

1. Prepare an analysis of the extent of doubtful debts and the average debt collection period for the companies in an industry.

The industries I have chosen to analyze the receivables of are Cosmetic Industry, Pharmaceutical Industry, Automotive Industry and the Retail Industry.

Cosmetics Industry:

The extent of provision for doubtful debts in this industry is more or less the same. The extent of provision for doubtful debts in the following companies is as follows:

1. Revlon – 1-2% of total debtors.2. L’Oreal – 1.5% of total debtors.3. Dior – 8-10% of total debtors.4. Estee Lauder – 2-5% of total debtors.5. Avon – 16-18% of total debtors.

This percentage is set in each company based on past experience. There is not fixed percentage based on sales of the company. The average debt collection period (ADCP) of the companies is as follows:

1. Revlon – 51.5 days.2. L’Oreal – 60.05 days.3. Dior – 44.33 days.4. Estee Lauder – 41.28 days.5. Avon – 30.65 days.

The average debt collection in this industry is done in 26 to 64 days range. The debt collection period of Avon is good. It is done in around 30 days. While the other companies take much longer time. Overall, as mentioned earlier, the credit period of this industry is 2 months. This is not a very long period. On the other hand this is not a short period also. The quality of debtors is good. That is why the time period given to them is also not very much.

Pharmaceutical Industry:

The extent of provision for doubtful debts in this industry is very low. This means that most of the receivables are received in time and without default. The quality of debtors is very high in this industry. The provision for doubtful debts is 1-2% of the total debtors. The average debt collection period in this industry is 70 days. The range of debt collection period when calculated comes to 61 – 79 days.

Automotive Industry:

There is no standard debt collection period in this industry. The average debt collection period of the automotive industry is as follows:

1. Audi – 66.93 days2. BMW – 152.12 days3. Honda – 82.1 days4. Ford – 215.63 days5. Toyota – 112.31 days

This inconsistency was more pronounced in 2009 reports when the world economy was in recession and the sales of the cars slowed down dramatically. The debt collection period also increased because of recession.

Retail Industry:

The retail industry is where the final consumer buys directly from the retailer. The consumer has to make payment on the spot in the form of cash or credit or debit card. When a consumer pays the retailer in the form of a credit card, receivables for the retailer are created. The company has to receive payment from the bank of the credit card of the customer. Till the bank pays the money to the retailer, it is called as ‘receivable’ for the retailer.

This repayment is done fairly quickly by the bank. Thus trade receivables are less and also they are repaid quickly, if any.

The following is the average debt collection period of various retailers:

1. Wal-Mart – 3.6 days2. Tesco – 11.33 days3. Carrefour – 12.23 days4. Metro AG – 3.5 days5. Costco – 4.11 days

Thus the receivables are usually collected within a 3 to 10 day time period. The provision of doubtful debts is negligible. It is because the receivables are mostly banking organizations. They rarely default.