Cash Conversion Cycle

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1. Introduction
Increasingly, we are seeing many firms from various industries allowing their customers to pay on credit. This action will inevitably have a direct implication on the financial statements of these firms, in terms of accounts receivables, allowance for bad debt and uncollectible debt expense. This is especially so when customers are unable to repay their debts. In this paper, we will examine the 2008 financial statement of four companies in the retail industry, namely Courts Singapore Private Limited, Dairy Farm International Holdings Private Limited, Isetan Singapore Private Limited and OSIM International Limited. We will look at the amount of receivables of each company. In particular, their allowance for bad debts and bad debt expense in their financial statements. 2. About Courts Singapore Private Limited

Headquartered in Singapore, Courts opened its first retail outlet in Singapore in 1974. It is one of the largest furniture, electronics and IT retailers in Southeast Asia. In line with its mission 'To be the most customer oriented, profit focused retailer making inspirational home products easily affordable', Courts is committed to offering the best home products at the right prices. Courts started as a furniture retailer and subsequently started retailing electrical products in the 1980s and IT products in the late 1990s. Courts carries the largest selection of home furnishings, domestic appliances, home entertainment solutions and the latest digital technology. It also offers consumers a hassle-free in-house credit option, MAX Credit, to make consumers' dream lifestyle more affordable. Courts currently has ten stores located island wide in Singapore. The company was listed in 1992 and became delisted in 2008. (Courts,2010) 3. Comparison Of Companies Under Investigation

2008 | | | |
Dec| 31| Dr Allowance for Bad Debt| 16,019,000| |
| | Cr Accounts Receivable| | 16,019,000|
| | To write off bad debt| | |
Dec | 31 | Dr Bad Debt Expense | 17,332,000 | |
| | Cr Allowance for Bad Debt | | 17,332,000|
| | To estimate bad debts for the period | | |

Account Receivable

Bad Debt Expense

Begin Bal. 19,815,000

Allowance for Bad Debt

Ending Bal. 21,128,000

Before we compare Courts’ Cash Conversion Cycle with the other 3 companies in the retail industry, let us look at Courts Cash Conversion Cycle for the past 5 years (2004-2008) first.

Courts Cash Conversion Cycle (5 Year Series)
(Amount in Days)| 2004 | 2005 | 2006 | 2007 | 2008 |
Average Collection Period (ACP)| 242.09| 216.67| 203.08| 225.57| 185.44| Average Resident Period (ARP)| 50.48| 46.11| 40.54| 56.44| 46.47| Average Payment Period (APP)| 36.25| 34.71| 31.52| 48.30| 45.30| Cash Conversion Cycle (CCC) | 256.32| 228.07| 212.09| 233.70| 186.61|


Average collection period is on a decreasing trend from 2004 to 2008. Courts receivables level has been on a decreasing trend from 64.1% of sales revenue in 2004 to 48.4% in 2008. These evidences show that Courts have improved its credit policy. Courts has became more stringent in granting credit purchases for customers. With a pool of customers with better credit-rating, prompt payments of receivables can be ensured. However, there is a sudden increase of 10% from 2006 to 2007 and a sharp decrease by 17.73% (40 days) from 2007 to 2008. This may be due to the Courts’ introduction of “Courts Easy Access” internal credit policy in February 2007 which encouraged more sales via credit, which in turn resulted in increased receivables and a longer receivables collection period. The 2008 decline may be due to the global financial crisis causing people to hold back big ticket purchases from Courts, and thus reducing the...
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