Balance sheets and income statements are historical rather than forecasts. They represent a record of the financial performance of business operations. Comparative balance sheets and comparative income statements exhibit trends; a clear understanding of these trends based upon sound ratio studies may convey some premonition regarding the immediate future of a particular business operation, provided management policies as well as environmental conditions do not change radically.
Presented here are three important financial indicators regarding the financial control and management of working capital for a particular business operation of the PN, which are expressed in number of days, also called the average period.
One is the “inventory turnover” which is obtained by dividing the average inventory by the average gross sales per day. The inventory turnover is the average period in days between purchase and sale of merchandise.
The second is the “average collection period” which is obtained by dividing the average receivables by the average gross sales per day. As the term implies, this represents the average number of days between selling and settlement of dues.
The last is the “average payment period”. This is the ratio of average payables to average gross sales per day and represents the average number of days between purchasing and payment for merchandise or services.
The relative values of these indicators will indicate an excess or shortage in the working capital of a particular business operation and, at the same time, efficiencies of management practices in such operations.
A knowledge of the significance of these important indicators will point out whether a financial condition is wholly or partly good, questionable, or poor, but the great unknown is always management, which has the power to improve the condition or hasten the ruin of business operations. It is not the value of the indicators that mean a business concern is out of line, the values are the symptoms. Some managements can overcome or mitigate the weaknesses; other managements fail to recognize the symptoms or lack the ability, the aggressiveness, and the knowledge to overcome or mitigate them.
The overall working capital turnover for the PN for the period between 1983 and 1986 is indicated in Appendix XI - 1.
The inventory turnover period in 1984 exceeded that in 1983 by nearly 20 days. It has however reduced continuously since then.
The average collection period of receivables has also taken a similar course, of which total period from purchasing of goods and collection of receivables had reached more than 6 months in 1984, however, the largest shortage in working capital was accrued in 1983 and it was approximately at M$200 thousand.
On the other hand, the average payment period of payables has taken almost the same course as the collection period resulting in the balance of the payment and collection periods being in the same situation. However, the increase or decrease in excess/shortage of working capital has not been reflected in the outstanding balance of the cash account.
The financial position of the working capital turnover was most favourable in 1986, but the total average period between purchasing and collection of 49 days in the year should still be considered excessive as the PN, as a rule, is operating most of its business activities on cash basis.
Moreover, it must be noted here that the reduction of all periods in 1986 was fundamentally attributed to the steep rise in sales volume, and not to the improvement in financial management.
The turnover of working capital of the fuel supply project for the period between 1983 and 1986 is indicated in Appendix XI - 2.
An unusual situation is found in the accounts receivable figures of which have never fluctuated during the period except in 1986. The decrease amounting to M$10.00 at the end of 1986 may have been caused by misposting in book-keeping or as a result of typegraphical error. This account of receivables should be judged as a frozen account. Therefore, the actual period of turnover should have been much shortened thus bringing the project a large sum of balance in the cash account. But this sum of cash balance is cancelled out by a large sum in the account of payables which may include considerable sums of frozen accounts. This shall be analysed in detail in the next chapter.
The table of working capital turnover of the ice supply project for the period from 1983 to 1986 is presented as Appendix XI - 3.
As an inventory of ice stock which was recorded as a small amount only at the end of 1986 shall be negligible, the analysis of revolving of working capital in this project was made only on receivables and payables.
The volume of gross sales, average receivables and average payables have taken almost similar courses during the period under consideration. Due to a large increase in gross sales volume in 1986, however, the average period of turnover for both receivables and payables has been shortened.
Due to a large sum always recorded under the item of payables, the project has carried the excess in working capital which resulted in a steady increase in the balance of cash account.
The working capital turnover of the fish marketing project for the period between 1983 and 1986 is indicated in Appendix XI - 4.
A most unusual situation is observed in 1985 where the average collection period is almost 1,000 days. This abnormal figure is, however, caused by the sudden drop in sales volume of the year. Thus, this figure for 1985 should be ignored in any analysis.
It must be mentioned that due to payments made in cash to fishermen (except in 1982 and 1986), the project has always carried the working capital in negative figures, but the shortage of working capital has shown enormous increase in 1986 even though there was a large amount of payables being accrued.
As the volume of sales in fish marketing is expected to grow in future, the shortage in working capital will inevitably get worse. Furthermore, once a new fish complex is completed in Tumpat in the near future, the shortage in the operational fund in fish marketing in both Geting and Tumpat will be doubled which may bring a serious financial crisis to PN management.
Strict control in the collection of receivables from fish dealers is thus advised.
The working capital turnover of the retail shop project for the period from 1983 to 1986 is indicated in Appendix XI - 5.
A most unfavourable financial situation is found in the inventory turnover for the period. Although the number of days between purchasing and selling are being successively reduced, the situation is still bad.
From every practical view point, the size and balance of the inventory of every business operation are of great importance. Inventories have often been called the “graveyard of a business” because they have so frequently been the prime cause of business failure, as in the case of the retail shop project of the PN. Inventories that have been allowed to become unwieldy often contain an ill assortment of poorly chosen or obsolete goods, which may result in heavy losses, as seen here in the results of the operations in 1985 and 1986.
Another abnormal situation can be found in the turnover of payables. The average payment period was between six months to one year. The outstanding balance in payables might have included large frozen accounts.
In a very practical manner, as liabilities increase above a certain level, the management has more and more difficulty in meeting its financial obligations within the scheduled time. However, a large part of these payables carried forward for many years are payable to the former LKIM Central Purchasing Unit. These accounts might have been frozen in the books of both LKIM and the PN, and the PN management probably feels no obligation to make payment.
The next unusual situation is observed in the item of receivables. LKIM advised the PNs to separate the proportion of receivables of overdue by more than 90 days from those receivables due for sales in the normal course of daily operations, and to carry those accounts as a doubtful or bad debts. The long collection period of receivables indicated in the appendix, however, always exceeded more than 90 days except in 1985 when it was slightly shorter than 90 days. It is quite likely therefore that the majority of receivables carried forward are bad debts.
Furthermore, the average collection period was computed based on total gross sales of which a larger proportion might have been cash sales. If the computation were made based on the net credit sales, the real average collection period would have been much longer.
No evidence can be found that the management has taken any measure to correct these situation except the dumping sale attempted in 1986 to reduce the inventory level. It seems that the management has let the operation of retail business take its own course.
