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CASE 28

FOSTER PHARMACEUTICALS

(Receivables Management)

Introduction

3 Key Learning Points (KLPs)

This case focuses on receivables management for four customers of a pharmaceuticals business.
The purpose of this case is to introduce you to the three techniques most commonly used to monitor a business’s receivables:

Average collection period

Aging schedule

Payments pattern approach

Introduction

There is a spreadsheet model for this case.
The model converts sales and collections forecasts into average collection periods, aging schedules, and uncollected balances schedules.

Spreadsheet Model

From the ACP, it appears that customers are paying faster in the second quarter than in the first.
From the aging schedule, it appears that customers are paying more slowly in the second quarter than in the first (a greater portion of the receivables are now “older”)
ACP and the aging schedule provide useful monitoring tools but only if sales are stable over time.

KLP 1: ACP and aging schedules give incorrect signals when sales are seasonal

Increases the receivables balances
Lengthens the ACPs
Lengthens the aging schedules
Increases the receivables/sales ratios in the uncollected balances schedules
Increases the carrying costs of receivables

KLP 2: If customers pay more slowly, this has financial consequences.

Foster should utilize the vendor services for both Large Retail Chains 1 and 2 because the carrying costs would be reduced by more than the cost of the services.

The vendor would not be worthwhile for the Regional Drug Store and the Small Grocery Chain because the cost would exceed the reduction in receivables’ carrying costs.

In addition, there may be patient and community relations issues to consider when increasing collection efforts.

KLP 3: Collection efforts may be worthwhile only for some customers.