The Methods For The Management Of Current Assets In An Organization: Ratios And Findings

“No employment can be managed without arithmetic, no mechanical invention without geometry.” -Benjamin Franklin, mathematician, author, printer, political theorist, politician, free mason, postmaster, scientist, inventor, humorist, civic activist, statesman and diplomat.

I have selected two investment holding companies in the form of Pick n Pay and Shoprite. The nature of the two businesses concerned is they are both the parent company over a number of businesses in a group cluster.

Companies which compete on the sort of platforms that Pick N Pay and Shoprite do have a large number of resources to work with but have a huge mandate concerning efficient maintenance of these resources over the long term.

Both of these firms have adopted the method cost under the weighted average pricing scale as well as using the Net Realizable Value selling price in the ordinary course of business.

The Financial Statements are prepared on a going concern basis as neither firm has the intention nor the required need to reduce any material aspects of their operations. A methodology of each company functioning without the immediate threat of liquidation for the anticipated future.

What is to be expected in the coming pages is an evaluation of these long standing pioneers in the retail industry and how they have been managing their current assets over the last 12 months being the financial year 2017 under review and the ratios and theory linked together.

Inventory includes merchandise for re sale and consumables. Inventory is measured at the lower of the cost and the net realizable value and is identified as a current asset as it is expected to be depleted within the groups’ normal operating cycle. This is the case for both firms.

Cost is calculated on the weighted average basis and includes expenditure obtained in attaining inventory bringing them to their existing location and situation including distribution costs and is stated as net of important purchase.

Cash Management should focus on minimizing cash position and simultaneously it is sufficient to maintain current financial liquidity, as it is of fundamental significance for the evaluation of the credit rating of the company by different partners in business turnover. A very important aspect of cash management in a company is the acceleration of the payments availability by reducing the time of their realization. It involves being consistent with the collection of receivables as well as the efficient process of issuing the invoice and the reduction of the so called cash in transit, that is when receivables are paid in by cheque.

Cash surpluses over the long term should be deposited in instruments or investment projects, whereas temporary cash surpluses should be invested in short term instruments. The crucial function is that a temporary cash deficit should be financed by cost effective financing sources. The main component of cash management in a company should be a cash budget which would predict cash inflows and outflows.

Receivables management includes three elements that are defining credit policy in relation to the clients, receivables controlling and debt collection. Corporate credit policy in conjunction with its recipients comprises defining credit period, credit standards, and receivables collection policy and payment discounts. Using the trade credit results in the increase in turnover, but also causes the increase in costs associated with additional short term external financing. As a result the scope of credit policy in these companies should be preceded by a detailed calculation of its profitability based on the forecast of sales increase as a result of using certain trade credit policy as well as a prediction of non-collective receivables.

The maintenance of current assets is concerned with decisions within the cycle of current assets of material and legal nature are converted into cash, and one of the aims of the current assets management is to minimize the cash conversion cycle.

This can be accomplished by reducing the inventory conversion period and receivables collection period, and by ultimately maximize short term protection plans. Although in essence reducing the cash conversion cycle would be the most logical decision within designated limits that is only to the extent when it does not cause the increase in costs and drop in sales.

Companies which compete on the sort of platforms that Pick N Pay and Shoprite do have a large number of resources to work with. For many firms both the permanent and temporary forms of working capital are necessary to facilitate production and sales through the operating cycle. Pick N Pay has a net working capital concern whereas Shoprite has been able to manage this function a lot better over the last two years. From a current ratio perspective Shoprite has been able to keep and maintain a healthier cycle of managing their debt.

With particular reference to the inventory turnover ratios and the average payment period ratios Pick N Pays planning has steadied against Shoprite.

Pick n Pay has a slight deficit in form of current assets as to current liabilities and this needs to be changed through methods of increasing cash sales and reducing credit sales over the next 12 months.

However Pick N Pay seems deplete their inventory a lot faster than Shoprite has been able to do over the last 12 months. The going concern principle seems to be working for both companies however the threat of liquidation could become serious if the short term liquidity aspect is not remedied sooner than later.