Chapter 9 Case Questions

Qualitlyl Home Health (QHH) has been expanding rapidly over the past five years. Although paper profits (i.e, earnings that are shown on reports but may not translate into actual cash in the bank) have been stable at about 3.5 percent of operating revenues, the liquidity of the company has become a concern. You, the CFO, have noted that days cash on hand has dropped to 12 and that the current ratio has decreased to 0.4, while days in accounts receivable has increased t o 122 and inventory turnover has decreased substantially. The CEO would like you to anwser the following questions:

1. Why does cash flow and liquidity become a problem during company growth?

2. How can a company have healthy profits but lack funds to a pay basic expenses?

3. What is the relationship between liquidity an accounts receivable?

4. What could QHH do to improve its liquidity?