Milwaukee Surgical Supplies the Firm\'s Average Collection

Milwaukee Surgical Supplies

The firm's average collection period can be calculated by taking the weighted average of the payments days:

= 27 days average collection period

The current receivables balance would be calculated as follows. The company sells an average of $1,200,000 / 360 = $3,333.33 per day. At 27 days outstanding the current receivables balance would be:

$3,333.33 * 27 = $90,000

If all non-discount customers paid on the 30th day, the average collection period would now be:

+ 21 = 24 day average collection period.

The new receivables balance would be as follows:

$3,333.33 * 24 = $80,000

The savings from the toughened credit policy would be the different in receivables level multiplied by the cost per annum:

(90,000 -- 80,000) * .08

10,000 * .08 = $800

The savings from the toughened credit policy is $800 per year.

Financial statement analysis reflects the firm's commitments under generally accepted accounting principles (GAAP). Operating indicator analysis can use the financial statements, but also sometimes uses industry-standard or proprietary performance measures as well

Under GAAP, the financial statements are consistent and this benefits the analyst, because the statements are comparable to those of competitor or to those of the same company in previous years. Financial statement analysis also seeks to utilize financial ratios to gain insights into the firm's performance. The financial statements themselves illustrate the performance, but the ratios provide a framework for understanding that performance in more detail (Loth, 2011).

Operating indicator analysis uses both the financial statements and proprietary financial information to gain insight into different aspects of a company's operations. Some of the data used in operating indicator analysis is not the same data that is contained in the financial statements. It is often more specific, and more tailored to the needs of the organization.

Both types are useful to health services managers. Financial ratio analysis is useful because it is comparable. The manager can compare his or her own company's performance to that of competitors, for example, and know that these comparisons are valuable. Operating indicator analysis is useful because the company can tailor this to its own needs. The sources of data are more diverse and these indicators speak directly to the objectives that the company has.

6. The market multiple approach to business valuation assumes that investors are entirely rational and have full information. This means that the investors have priced the company as a level that is equivalent to the true value of the company.