Milwaukee Surgical Supplies Inc - Firms Average Collection Period - Research Paper Example

Milwaukee Surgical Supplies Inc - Firm’s Average Collection Period 1. Calculate the firm’s average collection period. Average collection period will be; 30% in 10days 30%*10 = 3 days 40% in 30days 40%*30 = 12 days 30% in 40days 30%*40 = 12 days 27 days Average collection period would be 27 days. 2. Calculate the firm’s current receivables balance. (Average collection period, Investopedia.com) Current Receivable Balances = $1,200,000 * 27/365 = $88,767 3. Calculate the firm’s new receivables balance if Milwaukee Surgical toughened up on its collection policy, with the result that all non-discount customers paid on the 30th day. 30% in 10days 30%*10 = 3 70% in 30days 70%*30 = 21 New average collection period would be 24 days if Milwaukee Surgical toughened up its collection policy. New receivable balances = $1,200,000 * 24/365 = $78,904 4. Assuming the cost to the firm to carry receivables is 8% per annum; calculate the annual savings resulting from the toughened credit policy. (Assume the entire amount of receivables had to be financed.) To calculate the annual savings that would result because of the toughened credit policy, it would be necessary to calculate the amount of finance charges incurred on the previous or the earlier debtors. After that it would be compared with the 30 days toughened policy finance charges. The difference between the two would be the resulting savings from the toughened policy. Initial carrying Expense (8% * $88,767) 7,101 New carrying Expense (8% * $78,904) 6,312 Amount Saved 789 5. What is the primary difference between financial statement analysis and operating indicator analysis and why are both types useful to health services managers? “Financial management entails planning for the future of a person or a business enterprise to ensure a positive cash flow. It includes the administration and maintenance of financial assets. Besides, financial management covers the process of identifying and managing risks”. An organization is any entity that is given the admission by the by the state or the government of that country to perform the business activities that can bring profit to the fir and its shareholders (those activities must be within the legal framework of the government). Financial statements are used to record financial activities of an organization, they usually represent the performance of a company over a particular period of time and these analysis are used by many potential users for their respective purposes. An organization’s financial statements are used by many different users, e.g. potential investors investigate and appraise a company’s performance and based on these evaluations made with respect to the financial statements, investors decide the company which suits them. Suppliers and Customers are also among all the different users of financial statements. They use the financial statements with their own personal interests and then weigh the company’s performance accordingly. Performance measurement is a part of the system of financial control of an enterprise as well as being important to investors. Financial statement analysis is the analysis of the financial perspective of an organization. In financial statement analysis, an organization’s financial performance is heavily focused upon. This is usually done at the expense of other non-financial issues. A company’s financial statements are reviewed and its performance it evaluated with regards to financial issues such as increase in Sales, profit, reduction in costs, etc. the main areas that are usually focused upon are the financial issues and upon those financial findings, a conclusion is given about the company’s performance. Ratio analysis is the most popular way of performing a financial statement analysis. Operating indicator analysis on the other hand is to review the performance of an organization using non-financial information. Such non-financial indicators are heavily used for service industries, although they are also used by other manufacturing organizations as well, their popularity has been at peak amongst service and other not for profit organizations. Examples of non-financial indicators for a hospital would be the number of mortalities, Patients advised/ treated in a day, number of similar complaints received from the same patient, etc. Operating indicator analysis includes evaluating current productivity, reviewing price of the services provided, identifying possible cost saving areas, creating incentive compensation systems, etc. The operating indicator service is feasible for organizations such as Milwaukee surgical supplies Inc. Strategic operating indicator service is derived from self-reported surveys collected from 2,000 hospitals nationwide. The operating indicator is a report for benchmarking issues which shows information related to 61 operating indicators for the preceding five year, operating indicators for a rival hospital in the preceding five years, etc. This information is taken up by as a mean to benchmark one’s own performance and perform with the optimum possible capability. (Bernstein, 1978) 6. Describe the mechanics of the market multiple approach to business valuation Discounted Cash Flow (DCF) technique is a popular business valuation technique but besides it, the other most successful technique is the market multiple approach. Market multiple approach uses a concept that all assets which are similar to one another should be sold at the same price. Hence according to this concept, each and every company having a similar risk exposure and market growth prospect would be easily comparable to each other. When selecting similar companies, there are many issues that need to be looked upon e.g. size, gearing, growth, industry, etc. After all these implications, a suitable and comparable organization can be selected. The main steps involved in the market multiple approach are; Finding comparable companies having similar financial ratios, growth, size, etc. Calculating key ratios for these comparable organizations. The key ratios are summed together and an average is made. This average ratio is used to ascertain the indicative value. Finally a valuation judgment is made. (Pratt et al, 2008) References Average collection period, Investopedia.com http://www.investopedia.com/terms/a/average_collection_period.asp Bernstein, L. A., & Bernstein, L. A. (1978). The analysis of financial statements. Homewood, Ill: Dow Jones-Irwin. Pratt, S. P., & Niculita, A. V. (2008). Valuing a business. McGraw-Hill. Read More