Management of trade credit is defined as receivables management. Receivables form a part of the three major elements of working capital apart from the inventory and cash. Receivables assume the next priority after inventories and hence, have a strong position in terms of current assets in many firms. The capital that the receivables contain is same as the investment in cash, as well as inventories (Guerard, 2013). Beyond question, trade credit is a potent tool because it bridges the gap from the mobilization stage to the distribution. Receivables can be tagged as the safeguard of sales from various forms of competition. It attracts customers and influences them in purchasing the goods at various terms and conditions that is favorable to the customers and the firm. The management of receivables demand consideration because it contains an element of risk (Melville, 2013). However, each penny can add to the worth of the firm.
The Vodafone group activities initiated in a low phase, however, with the due passage of time, it turned out to be a giant in the field of telecom. The presence of the company can be spotted in more than 27 countries have its networking in 48 countries. The goal of the company is to increase the quality services and ensure strong networking that will provide huge advantages. Its headquarters is based in London and it has occupied a major chunk of the market (Vodafone Group Plc, 2016). During the process of listing, the market capitalization appeared at £89.2 billion. The secondary listing of the company is at NASDAQ.
British telecommunication is popularly known as BT Group Plc and headquarters is located in London. The company has its presence ensured in more than 167 countries. It has a wide range of activities such as services pertaining to mobile and fixed line services. The company is even engaged in selling products on a wholesale basis to the service providers in the UK. The global presence and effective services are one of the positive aspects of the company (BT Group Plc, 2016).
Receivables emerge as a major portion of the current asset. In both the companies there is a strong increase in the receivables indicating the investment both the company had in it. When it comes to investment, there are various costs linked to it that the company near to undertake with the risk arising from bad debts (Fields, 2011). Therefore, it is necessary to give a strong control, as well as management of receivables that helps in ensuring sound decision of the investment. For effective receivables, the management needs to tame the credit and ensure clear practices of credit. It must be in tune with the credit policy of the organization. The management should have a strong knowledge and must be vigilant while accepting new accounts (Gibson, 2012). Hence, it is the need of the hour to develop proper credit limits for every customer and follow that.
It is vital for management to lay special stress to inventory management. Inventory management can be done when there is an effective practice concerning purchasing, handling, and accounting (Needles & Powers, 2013). When there is an efficient system of inventory the management will be in a strong position to ascertain the purchase, quantity needs to be purchased, where to store, etc. Inventory management will lead to management in terms of management and operations (Fields, 2011). Hence, this will strengthen the working capital management and lead to an uninterrupted flow of inventory thereby eliminating any chance of under stocking and over stocking.
JIT & EOQ in Working capital management
There are numerous innovative tools that help in the management of inventory such as JIT management and total quality management (TQM). Just in time is a strategy that is associated with the inventory and is employed to enhance the level of efficiency and leads to reduction of waste by receiving goods when the need arises in the process of production. Hence, the producer can predict the demand accurately. But, the most effective model is the economic order quantity (EOQ) as it helps in providing answer to the question what quantity should be ordered?. The ordered quantity must be optimum that will help in optimization of everything like the space needed or blockage of money in the inventory. On the contrary, the ordered quantity should meet the requirements. Lack of inventory can lead to production woes.
This ratio aims to offer an efficient comparison of the revenue elements with that of sales. Moreover, a company focuses on reaping huge profits and therefore, it assists in highlighting the income status of a company (Gibson, 2012). Furthermore, the skills of a company are determined comparing the income with that of the costs and other expenses incurred in a specific period.
It is defined as gross profit to sales or revenue. It assists in offering the leftover sales after management of cost of goods sold of a company (Choi & Meek, 2011). In relation to Vodafone, the gross profit margin declines every year, thereby depicting improper management of cost of goods sold, whereas BT Plc portrays huge enhancements every year and it is by dint of the strong management of cost of goods sold (BT Group Plc, 2016).
This is computed by dividing net profit by sales and it signifies left over sales after considering all the costs. In relation to Vodafone, the net profit margin declines every year but in 2014, it depicts a huge increase because of massive earnings in the year. On the other hand, BT Plc portrays an improvement every year, even though it is a slight improvement.
It is considered a vital ratio that links the company’s earned gains by its entire resources (Davies & Crawford, 2012). Therefore, a higher ROCE depicts a well-to-do position for the company. After the ratio computation, it can be seen that both Vodafone and BT Plc have witnessed a drop in their ROCE every passing year. While that of Vodafone also witnesses a negative figure in 2014, the decline in BT’s case is not a big one, except for 2016 (Vodafone Group Plc, 2016).
This ratio aims to compare the profitability in association with the total assets of a company. In the case of Vodafone, the ROA was immensely higher in 2014 due to its higher net profit in that year. However, a decline can be witnessed in 2015 and a negative figure in 2016, which is a bad indicator. On the other hand, BT Plc also witnessed a stagnant ROA until 2014, but it started declining since then.
This ratio is a strong indicator of the liquidity position of a company. It assists in determining whether the company has enough assets to meet its debt obligations in future. Furthermore, the normal current ratio stands at 2:1, which implies the company has £ 2 of current assets for every £ 1 of current liability (Davies & Crawford, 2012). Hence, a weaker current ratio indicates a deficiency in the company to meet its debt obligations. On the contrary, a higher current ratio might be a problem because it indicates idle assets of the company that is not utilized for generating a return.
According to the ratio computation, it can be observed that the liquidity of BT Plc depicts immense fluctuations but gradually improves until the year 2016. Moreover, it remains below one that is a bad indicator for the company. On the other hand, Vodafone’s current ratio also remains below one for the entire five years and is subject to extreme fluctuations. This can be attributed to the fact that there is a rise in current liabilities and fall in current assets of both companies (BT Plc, 2016).
This ratio assists in depicting liquidity in a better way because it does not take inventories and prepaid expenses in consideration, and therefore, when meeting the debt obligations, inventories will not be sold. The base quick ratio stands at 1:1, which implies that current liabilities can be met by the current assets of a company, without taking into account its inventories.
In relation to Vodafone, the quick ratio is subsequently below one in all the five years that is a bad indicator in terms of liquidity management. It can be an issue as the quick assets are used to satisfy the current liabilities of a company. On the contrary, the quick ratio of BT Plc remains above one except for the year 2014. However, it also declined after the year 2014 after depicting an immense quick ratio.
This ratio is utilized to ascertain or evaluate the capability of a company to meet its long-term debt obligations. It is also called leverage ratio and signifies whether the cash position is in a string position to meet the obligations (Graham & Smart, 2012).
It measures the ability of a company as a percentage of its entire assets. In simple words, it shows a company’s capability to pay off its liabilities with its assets. In relation to Vodafone, the debt ratios have remained low in each of the years that show lesser debt utilized by the company. On the contrary, the debt ratio of BT Plc have enhanced since 2012 and declined after the year 2014 (BT Plc, 2016). This depicts that the company has no stable business because it has higher overall debt in all the years and which is a bad indicator for the company.
This ratio compares the overall debt of a company to total equity. It points the composition of financing of a company in percentage that originates from investors and creditors (Deegan, 2011). In relation to Vodafone, its debt-equity ratio has witnessed slight trends except for the year 2016 thereby showing unstable business because of higher overall debt. On the other hand, BT Plc depicted immense fluctuations and remained negative in 2013 and 2014, thereby portraying a weak financial position and immensely higher debts (BT plc, 2016). However, it declined after 2014, thereby showing improvement.
This ratio projects how efficiently the company performs by using the assets to generate income. It comprises of the Debtor turnover ratio, creditor, and the inventory turnover ratio. The major utility is that of the debtor’s receivables or receivables and the inventory turnover ratio (Brigs, 2013).
It indicates the company’s efficiency in meeting the credit that is provided to the consumers and the process of collection. When the receivables turnover ratio is high it indicates that the company has a strong policy to collect the amount. However, when the ratio is low it can be viewed that the company fails to realize the money on time (Brigs, 2013).
|
Receivables turnover BT Plc |
11.02748 |
11.36089 |
12.76579 |
12.733 |
11.44351 |
|
|
Receivables turnover Vodafone |
11.94724 |
11.21362 |
10.16961 |
11.80456 |
9.468744 |
The ratio is declining indicating that the company is unable to realize the debts properly. Therefore, realizing the money on time will be a difficult task for the company.
BT Plc even has a low receivable turnover ratio which indicates that the company is unable to recover the money and collection are weak.
The receivables amount for Bt Plc comprises of 7940 million and the total assets comprise of 143455 million that provides the figure of 5.53% composition of receivable in the current assets. This means the company has strong amount being provided to the debtors and needs to be collected.
However, Vodafone Plc comprises of 24764 million when it comes to receivables and it comprises of 3% of the total amount in total asset (Vodafone Group Plc, 2016). Hence, the projection is low as compared to BT Plc. Therefore, it is in the case of BT plc more funds are locked in debtors.
This ratio enables the company in assessing the stock speed keeping into consideration the part of sales that means how quickly the sales can be done. Further, it helps in stating how efficiently the management of inventory can be done. When the ratio is high, inventory can be managed prudently (Brealey et. al, 2014).
|
2012 |
2013 |
2014 |
2015 |
2016 |
|
|
Inventory turnover Vodafone |
64.9434 |
64.76813 |
63.32772 |
70.79464 |
56.13527 |
|
Inventory turnover BT Plc |
131.0577 |
120.4251 |
16.75676 |
17.875 |
11.66078 |
The stock turnover ratio of Vodafone has enhanced till 2015 however, in the year 2016 it has declined that means Vodafone is now in a position to convert the finished goods into sales 56 times a year in contrast to 70 times a year in the year 2015. Further, the inventory turnover for BT Plc is low and has dropped stating that the company will convert 11 times the finished goods into sales (Horngren, 2013).
As per the computation from the balance sheet of Vodafone it can be seen that the inventory sum to 3026 million in the period from 2012 to 2016. It projects that the company has locked some 3026 million and hence it constitutes 0.36% of the total assets.
On the other hand, when it comes to BT Plc the inventories position of the company in all the five years comes to £ 572 million that constitutes 0.40% of the total assets. Hence indicates that 0.40% is locked in inventories. This means that BT plc is marginally higher when it comes to inventories assessment.
Conclusion
The above discussion signifies that inventory and receivables constitute a prominent part in the management of the working capital cycle. The above discussion and computation indicate that the Vodafone and BT Plc constitutes low amount is locked up in inventories indicating that both the companies have not locked their ample funds. This can be a wise decision to manage the working capital cycle. Further, debtors of the companies are in a controllable range signifying a proper attention. As per the profitability status, BT Plc ranks higher and is better placed as compared to Vodafone. Further, the liquidity of BT Plc projects a strong scenario. However, in terms of solvency, Vodafone is better placed as it has a low component of debt as compared to BT Plc which is alarming.
References
Brealey, R, Myers, S. & Allen, F. (2014). Principles of corporate finance. New York: McGraw-Hill/Irwin.
Brigs, A. (2013). Financial reporting & analysis. Mason, Ohio: South-Western.
BT Plc. (2016). BT Plc 2016 annual report. Accessed March 29, 2017 from https://www.btplc.com/Sharesandperformance/Annualreportandreview/2016summary/
Choi, R.D. & Meek, G.K. (2011). International accounting. Pearson.
Davies, T. & Crawford, I. (2012). Financial accounting. Harlow, England: Pearson.
Deegan, C. M., (2011). In Financial accounting theory. North Ryde, N.S.W: McGraw-Hill
Fields, E. (2011). The essentials of finance and accounting for nonfinancial managers, New York: American Management Association.
Gibson, C. (2012). Financial statement analysis. Mason, Ohio: South-Western.
Graham, J. & Smart, S. (2012). Introduction to corporate finance. Australia: South-Western Cengage Learning.
Graham, J. and Smart, S. (2012) Introduction to corporate finance. Australia: South-Western Cengage Learning.
Guerard, J. (2013). Introduction to financial forecasting in investment analysis. New York, NY: Springer.
Horngren, C. (2013) Financial accounting. Frenchs Forest, N.S.W: Pearson Australia Group.
Melville, A (2013). International Financial Reporting – A Practical Guide. Pearson, Education Limited, UK
Needles, Belverd E & Powers, Maria. (2013). Principles of Financial Accounting. Financial Accounting Series, Cengage Learning.
Vodafone Group Plc. (2016). Vodafone 2016 annual report. Accessed March 29, 2017 from https://www.vodafone.com/content/annualreport/annual_report16/index.html
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