Question

As a board member of Bronson Inc., your SVP-Accounting has recently presented the details of a five-year study of the firm’s cash conversion cycle, ironically, the period of time the SVP has been in charge. The executive summary spreadsheet outlines the following (where ICP = inventory conversion period, ACP = average collection period, PDP = payables deferral period, and AVE = industry average).

Column1	ICP	ACP	PDP	CCC	AVE
2015	48	34	42	40	59
2014	51	39	30	60	58
2013	41	31	53	19	53
2012	38	25	58	5	62
2011	31	21	56	-4	51

What are your questions, compliments, concerns, and recommendations?

Answer 1

When we analyze the data given in the table in the question, we make certain observations which help us answer the question effectively.

First we observe that the inventory conversiod period which reflects how fast the inventory is converted into sales is increasing from 2011 to 2014 which is a positive factor as it shows strong sales (or higher discounts which is not quite as favourable). The ACP is increasing from 2010 to 2014 which is not positive, lower ratio is preferable. The PDP was increasing from 2011-14 - not positive.

Questions: Why is that inspite of having a positive change in ACP & PDP in 2015, the cash conversion cycle drastically gone done from 2014 to 2015? What are the reasons for Company's poor CCC as compared to the industry average? What events have occured in 2015 that made the Company's CCC outperforming the industry to being so lagged behind? The CCC is highly fluctuation over the years, are there not proper procedures and policies relating to current assets and liabilities in place?

Compliments: The Company has managed to lower the ACP in 2015 from what it was in 2014 and it has also managed to increase the PDP in 2015 as against its position in 2014 - both are positive factors which the company should be complimented for and also motivated to continue the good performance.

Concerns - While factors such as ACP and PDP were not favourable from 2011 to 2014, ICP was quite favourable - does this imply that company was not actually increasing sales and giving huge discounts instead ? - this concern needs to be addressed. The concern regarding falling CCC and poor performance in the industry need to be addressed too. Except in year 2014 , company has constantly performed poor in its industry - concern as to company's liquidity position must be looked into.

Recommendation - Company needs to take liquidity as a serious issue and take steps in that direction. It must try to increase the ICP and delay the payment to creditors using its cash optimally and have proper system in place for collection of cash from customers. It must check whether fictitious transactions are recorded and take efforts to eliminate them.