Financial analysis is the process of evaluating business, project, budget, and other finance related transactions so as to determine if these platforms are able to perform and if they can survive through financial hurdles. Majorly, before an individual or an organization can acquire monetary investment, business analysis must be done to prove whether an entity is stable, solvent, liquid or profitable enough.
Many types of financial analyses such as Horizontal, vertical, short term, comparative analysis is used. The main objective in comparative analysis is to help investors to make decisions relating to their capital allocation. The analysis is done by comparing two companies, Columbia sportswear Company and V.F Corporation.
Table 1.0 Company Comparative Analysis
Details (Year 2014)
Columbia Sportswear Co.
Net Credit Sales ($’000)
Accounts Receivable Average ($’000)
(344,390 + 306,878)/ 2 = 325,634
(1,276,224 + 26,694 + 1,360,443 + 45,350)/ 2= 1,354,355.50
Accounts Receivable Turnover = Net Credit Sales ÷ Accounts Receivable Average
2,100,590 ÷ 325,634 = 6.45 times
12,154,784 ÷ 1,354,355.50 = 8.97 times
Average Collection Period = Days / Accounts Receivable Turnover
365/6.45 = 56.58 =
365/ 8.97 = 40.69 =
Adopted from Kimmel, Paul D., Jerry J. Weygandt, and Donald E. Kieso. Financial accounting: tools for business decision making. John Wiley & Sons, 2010.
Accounts receivable refers to the sum of exchange medium expected from customers by an entity after the company has offered services or goods, normally payable at a future date as pointed out by Higgins (154). Accounts receivable turnover is derived by dividing Net Credit Sales by the average amount of accounts receivables. Average accounts receivable is obtained by adding up the opening accounts receivable balance to its closing balance and dividing by 2. A higher figure indicates a company’s efficiency and effectiveness in debt collection while a lower figure indicates sluggishness with regards to the same as observed by Higgins (154).
For V.F Corporation, the average accounts receivable is $ 1,354,355,500. It should be noted that the amount of receivables used is the gross amount before deducting the allowance for doubtful debts (Higgins 154). All VF’s sales were on credit. Therefore its accounts receivable turnover is 8.97 times. The company collected its debts 8.97 times on average as at year 2014. Columbia Sportswear, on the other hand, has an average account receivable figure of $ 325,634,000. When its net credit sales are divided by this figure, the resultant amount is 6.45, which is the number of times the company collected its debts in 2014.
As seen in Table 1.0, VF Corporation has an average collection period of 8.97, compared with only 6.45 times for Columbia. Hence, the latter collected its debts 2.52 times more than the former. Considering the two companies big amounts of credit extension to customers, a range of 2.52 translates into many millions of dollars in sales. This picture portrays that VF has better credit management ability than its competitor, Columbia. The average accounts receivable shows how good a company is in managing its debts (Pew Tan, Plowman and Hancock 79). Firms which collects debts many times are likely to become more liquid hence eliminate cash flow problems. According to Pew Tan et. al. (80), debts are almost like interest-free loans to customers. In essence, the higher the figure, the better the credit management scheme is.
Average Collection Period (ACP) refers to the period in days taken for an entity to recognize credit sales using accrual basis until the time it receives payment for the same sales. It is usually obtained from the division of accounts receivable average by the net sales on credit. The quotient is then multiplied by 365, which is the number of days contained in most companies’ financial years.
In a lawful receivables management scheme, debt should be collected within 3 months as observed by Pew Tan et al. (91). Good credit management means debtors’ collection period should be shorter than creditors’ collection period. For VF Corporation, the ACP is 50 days compared to Columbia’s 57 days. It takes Columbia one more week to collect its debts as compared to its competitor. In a 52-week year, the cash-flows of the two companies differ significantly. The two financial analysis factors show that due to poor credit management, Columbia does not have sufficient cash flow to fuel operational activities unlike VF. In support of this, the cash flow statements reveal that the net cash flow for Columbia is $ 413,558,000 while VF’s is $ 971,558,000. This range of more than double means that VF has a higher competitive advantage in that it can benefit from economies of scale from its large liquidity aspect.
From the analysis, the strategic team of Columbia can employ corrective schemes to curb its weaker credit management as compared to its competitor (Kimmel, Weygandt and Kieso 59). One of these is to adhere to their credit policies. Most companies do not achieve good debt collection because they deviate from their credit policies as pointed out by Pew Tan et al. (93). The entity’s strategic fraternity can also conduct debtor’s pre-qualification to manage their accounts receivable effectively (Kimmel, Weygandt and Kieso 59). In such a program, any party who seeks credit services from the company will have their credit background checked. This can be done by comparing notes with the potential debtor’s previous transactions as well as bank statements and financial statements. According to Kimmel, Weygandt and Kieso (63), liquidity deficiency can lead to the fall of any company. As a last resort and to gain competitive advantage in the sportswear industry, Columbia can decide to merge with VF to realize the combined synergic effects of operating as one company. After all, their products complement each other.
Higgins, Robert C. Analysis for financial management. McGraw-Hill/Irwin, 2012.
Kimmel, Paul D., Jerry J. Weygandt, and Donald E. Kieso. Financial accounting: tools for business decision making. John Wiley & Sons, 2010.
Pew Tan, Hong, David Plowman, and Phil Hancock. “Intellectual capital and financial returns of companies.” Journal of Intellectual capital, vol. 8, no. 1, 2007, pp. 76-95.