V R Rao and Company has been operating for five
V. R. Rao and Company has been operating for five years as a software consulting firm specializing in the installation of industry standard products. During this period, it has experienced rapid growth in sales revenue and trade receivables. Ms. Rao and her associates all have computer science backgrounds. This year, the company hired you as its first corporate controller. You have put into place new credit granting and collection procedures that are expected to reduce receivables by approximately one- third by year- end. You have gathered the following data related to the changes (in thousands of dollars):
1. Compute the receivables turnover ratio based on two different assumptions:
a. Those presented in the preceding table (a decrease in the balance in trade receivables, net).
b. No change in the balance of net trade receivables; the balance was $ 963,808 at year- end.
2. Compute the effect (sign and amount) of the projected change in net trade receivables on cash flow from operating activities for the year.
3. On the basis of your findings in (1) and (2), write a brief memo explaining how an increase in the receivables turnover ratio can result in an increase in cash flow from operating activities. Also explain how this increase can benefit the company.
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