Monday, February 21, 2011

Money Saving Trick: Calculate the # of days it takes your customers to pay

When was the last time you reviewed your collections strategy/policy? It is important to adapt your strategy to changes in the marketplace and to track the trend in the age of your receivables. Consider sending the accounts 2 weeks earlier if you're finding that customers are delaying payment by 2 weeks or more. If you want to calculate the average # of days it takes your customers to pay you, here's a simple formula:
(Total Accounts Receivable/Total Credit Sales) x
(the # of days in the sales period examined)

For example, if your total accounts receivable is $150,000 and your total annual credit sales are $1,000,000, your average days outstanding is $150,000/$1,000,000 x 365 = 55 days. If your terms are 30 days, then clearly 55 days is too long and you need to be more proactive and stop financing your customers' purchases.

If you sell directly to the end user and your average days outstanding is more than 15 days beyond your payment terms (i.e. 45 days if your terms are 30 days), then you need to adjust your strategy. If you're further up the supply chain, as in manufacturing for example, your average days outstanding is likely higher as the money has to work its way up the chain and multiple delays along the way will affect you the most.

The NGA and WDDA have partnered with TransworldSystems to help you get paid more often and on time.  For more information, contact Brian A. White, Senior Cash Flow Consultant, at or 703-556-3424 ext 23.

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