Pearson Air Conditioning Case Study

Situation:
Pearson Air Conditioning & Service specialize in air-conditioning services at both an industrial and residential levels.
The company is still at their growing stage as it was purchased by father and son in the year 2002. The company has been very profitable so far with their highest profit recorded in the year 2011.
It appears that there is a problem in the managing of debt. The total debt exceeds the owner’s equity at this point.
The company continues to borrow money from to bank to pay their suppliers which are larger companies such as General Electric, Carrier, and York.

Challenges:
Ensuring the timely payment of account receivables.
Lowering long term notes Payable.

Actions:
Offering cash benefits to customers to ensure payment …show more content…
Evaluate the overall performance and financial structure of Pearson Air Conditioning & Service.
Over all the company appears to be profitable and successful. There is room for improvement, I believe the Sales revenue is really high in compression to their Net Profits. This could indicate an issue by how much the company is spending on their Cost of goods sold, and even on interest expense. Analyzing the Balance Sheet, I observed that the accounts payable is $38,585 which is pretty high considering that the Cash for the company is $28,789. A healthy company should have a cash balance can cover their account payable and then have extra cash left in their accounts.

2. What are the strengths and weaknesses in this firm’s management of accounts receivable and inventory?
One of the weaknesses with the management regarding accounts receivable is that they are not turning into cash fast enough. Not enough customers are paying for the services the moment they receive their invoice. Because the firm did no age accounts receivable so there is no specific knowledge of how many of these accounts are overdue. Another weakness that management has regarding accounts receivable is the fact that they don’t offer any special discounts if customers pay cash. This can potentially cause some of these accounts to not be paid or to get paid late if they become an account receivable. A strength that the firm has is that after the 30-day payment period, customers have to pay fees for …show more content…
Should the firm reduce or expand the amount of its bank borrowing?
The firm should definitely reduce its bank borrowing. Although the firm can build credit from borrowing from the back, they are also accumulating to their long-term notes payable which is old debt that has accumulated.
4. Evaluate Pearson’s management of accounts payable.
It looks like the company is acquiring too much debt and its long-term notes payable is $51,231 which probably accounts for a lot of the inventory sitting in a storage which is only building up interest. This company needs to hire someone who will help with inventory turn-over and to liquidate long term debt as well as Accounts payable. The account payable is larger than the companies cash account which indicates there is a problem.
5. Calculate Pearson’s cash conversion period. Interpret your calculation.
The Cash conversion period for Pearson’s is about 99 days. I calculated this by calculating the inventory turn over which is CGS/Inventory=5.20 the calculating accounts receivables which is Sales/Accounts receivable=12.82 and calculating average payables which is 38585 which is the accounts payable that I have. After getting this result I did the

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