Getting the money you are owed for the work you have done is crucial to the long term success of every business. Yet some businesses do not pay enough attention to managing their receivables. Perform Inc. has run into this problem and according to the balance sheets presented for the years 1995, 1996, and 1997 the company had almost all of their assets tied up in receivables. Perform Inc. is experiencing late payments and mostly likely delinquent accounts, which has impacted their cash flow and wrecked havoc on the company's liquidity. The business managers at Perform Inc must understand that it is very important to collect on their accounts because the longer an account is delinquent the less likely it becomes collectible. Ratio analysis was used to determine the receivables turnover for each year, as well as, the average collections period for each year. The resulting numbers were alarming, in 1995, the company's receivable turnover ratio was 4.91 and the average collection period was 74.3 days; in 1996 the company's turnover ratio was 4.83 and the average collection period was 75.6 days; and lastly in 1997 the turnover ratio was 4.61 and the average collection period was 79.2 days. Receivables turnover is an excellent way to gauge the effectiveness of Perform Inc.'s payment terms, the numbers above may indicate that Perform Inc.'s payment terms are too lenient. Many companies have repayment terms from 30 to 45 days. Therefore, Perform's days outstanding far exceeds that of industry standards. In addition, they must also ensure that a thorough credit check is conducted on all new business. That would help to give some indication of the payment practices of any new business.
The second cash flow problem Perform Inc. has is its low profit margins. Profits margins are simply the money left over after paying all the costs of running a business. An analysis of each year's profit margin was done and the results were as follows: 1995, the profit margin was 2.