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Cases in Healthcare Finance, 5th Edition Copyright 2014 Health Administration Press CASE 28 QUESTIONS FOSTER PHARMACEUTICALS Receivables Management 1. For all of question 1, ignore the forecasted receivables collection pattern in Exhibit 28.4 and the model. Assume that 30 percent of all customers will pay on the 10th day after the sale, 50 percent will pay on the 30th day, and 20 percent will pay on the 60th day. Assume a 360-day year. a. What is the projected average collection period (ACP) and average daily sales (ADS)? b. What is the firm's projected average receivables level? c. Assuming a 20 percent contribution margin and short-term bank loans costing 8 percent, what would the figures on both sides of the firm's balance sheet be at the end of the year if notes payable are used to finance the investment in receivables? d. If the annual rate of interest on short-term bank loans is 8 percent, what is the projected annual cost of carrying the receivables? e. Kathleen recently talked to the CFO of another small drug manufacturer who told her that they had been able to reduce their average collection period to 20 days. What would be the annual savings in the projected cost of carrying the receivables if Kathleen was able to reduce average collection period to 20 days? 2. Refer to the customer sales mix in Exhibit 28.1 and the monthly sales forecasts given in Exhibit 28.2. Assume that these amounts are realized, and that the firm's customers pay exactly as predicted in Exhibit 28.4. a. What are the accounts receivables balances and average collection period at the end of March and the end of June? b. Does the ACP indicate that the firm's customers have changed their payment behavior? Is ACP a good management tool in this situation? Explain. c. Do the aging schedules indicate that the firm's customers have changed their payment behavior? Are aging schedules a good management tool in this situation? Explain. d. Do the uncollected balances schedules indicate that the firm's customers have changed their payment behavior? Are uncollected balances schedules a good management tool in this situation? If you wanted to monitor one number from the uncollected balances schedule, what would be the best one? Explain. 3. a. For a given level of receivables, what factors influence the carrying costs of receivables? (Assume that quarterly ending balances are equivalent to average balances for the quarter). b. Which customer contributes most to receivables' carrying costs? Why does it contribute the most? 4. Now suppose each customer acts as follows: 10 percent pay in the month of sale, 40 percent pay in the month following the sales month, and 50 percent pay two months after the sale. What would be the impact of the change in customers' payment patterns on receivables balances, ACPs, aging schedules, uncollected balances schedules, and carrying costs of receivables at the ends of March and June? Explain your results. 5. Return to the original receivables collection pattern forecast in Exhibit 28.4. Suppose the company decides it needs to be more aggressive in collecting receivables to reduce carrying costs. In order to accomplish this, it contracts with a vendor to provide follow-up services for a quarterly cost of $500 per account (customer). For each customer this strategy can accelerate 15 percent of the receivables from the 31-60 day period to the 0-30 day period, and 15 percent of the receivables from the 61-90 day period to the 31-60 day period. For example, the assumed collection pattern for Large Retail Chain 1 12/6/2013 Case Questions Cases in Healthcare Finance would be 50% / 50% / 0% instead of 35% / 50% / 15%. Which customers should be targeted for followup services? 6. Return to the original receivables collection pattern forecast in Exhibit 28.4. The business receives financing, and it is developing pro forma financial statements for the second year of operations. Why are the accounts receivables balances different here than in the first year? 7. Return to the original receivables collection pattern forecast in Exhibit 28.4. Kathleen anticipates that the venture capitalists will ask some questions that can best be answered by some sensitivity analyses of the effects of sales variations. Suppose sales are a constant $400,000 in each month. Explain your results. 8. In your opinion, what are three key learning points from this case? Questions - 2