Debtors' Turnover
In the same way that stock control is a vital aspect of working capital management, so too is debtors' control. Many businesses need to sell their goods on credit, otherwise they might find it difficult to survive if their competitors provide such credit facilities; this could mean losing customers to the opposition.
Nevertheless, since we do provide credit, we must do so as optimally as possible. We've used the word 'optimal' before and let me confirm that it doesn't necessarily mean the best possible, but the best possible under the circumstances.
Why is credit control so important? For the Carphone Warehouse, the total amount owing by debtors was £149 million at the end of 31 March 2001, which as a percentage of total assets, is 14.09%. That's a lot of money in absolute terms and relatively, and it's 80% more than it was the year before.
So, they've given an additional £69 million worth of credit to their customers over the year. What we need to know, though, is whether they are controlling these debtors. We can do that by looking at their debtors' turnover ratios for the two years, firstly.
| Carphone Warehouse | 31 Mar 2001 | 25 Mar 2000 |
|---|---|---|
| £000 | £000 | |
| Turnover | 1,110,678 | 697,720 |
| Debtors due within one year | 149,200 | 82,826 |
The formula for debtors' turnover is:
| Debtors' Turnover | = | Average Debtors |
| Credit Sales/365 |
We have to assume, by the way, that all sales are credit sales unless we know which sales are for cash.
The calculations:
| Debtors Turnover Ratio for the Carphone Warehouse | ||
|---|---|---|
| 31 March 2002 |
149,200
1,110,678 ÷ 365 |
49.03 days |
| 25 March 2001 |
82,826
697,720 ÷ 365 |
43.33 days |
Well, what do you think of that?
Firstly, the ratio seems to have worsened by going from 43 to 49 days over the two years; and it means that, on average, the Carphone Warehouse's debtors are taking one and a half months to pay their accounts. Does this sound as if it's a good policy? How do we know?
One of the ways we can tell, in fact, whether this ratio is good or not is to go to a Carphone Warehouse shop or go to their Web site and find out their terms of business. If we sign up with them, will they give us around 49 days to pay our bills?
At the time of writing, the page http://www.carphonewarehouse.com/commerce/servlet/gben-store-Mobile shows that there are a number of ways we can choose to get a phone from the Carphone Warehouse:
- Pay monthly
- Handset only
- Pay for calls ... no line rental
- Pay as you go
Try and work out how it's possible to have a debtors' turnover figure of 49 days from these deals ... it's not! So what's the problem? Well, do they have corporate customers who are allowed to pay after, say, 55 days or 60 days? Do some research and find the answer if you can.
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