Accounts Receivable and Payable Cash Flow Optimization
27Aug 2019
Aug 27, 2019

Accounts Receivable and Payable Cash Flow Optimization

Elements to Increase Your Company Value: Financially: Part IV This blog is a continuation of the series on How to increase your business value with financial concepts:

  • Financially – Part IV

Today’s blog will present the addition of financial metrics different from the traditional bank financial ratios and metrics.

A/R Days – A/P Days

So many companies are now using invoicing software to help them when it comes to managing their invoices, but how many companies have invoices at “NET 30 DAYS” or “2% NET 10”?

Both of these will result in loss of cash flow and possibly overall A/R collection. Here is how a typical A/P clerk handles and invoice.

EXAMPLE: The invoice is dated on the 1st of the month. The A/P clerk receives it on the 3rd or 4th. It says net 30 so it goes into the next month 3rd or 4th bin but what if checks are only paid on the 15th and 30th so it goes into the 15th bin. It is processed on the 15th, mailed and the payment is received on the 20th. RESULT IS 50 DAY COLLECTION.

Unfortunately, your net 30 days will almost always give you a collection of 40-50 days.

SECRET: Invoice your statements with the date that is 10 days from the date of the invoice. For example: if invoiced on the 1st make the due date the 11th. THEN call between the 7th to the 10th and verify that they received your invoice. These two easy steps will reduce A/R collection from 40-50 days to 20-30 days and save you one-half month of lost monthly cash flow.

This does not always work because of late pay contracts but it is a simple fix to try and the benefits in cash flow can be large.

2% off if paid in 10 days

For the example what if you have a “2% off if paid in 10 days”, the big companies take off 2% and still pay in 30-50 days. It hardly ever works as designed. If the above collection technique is completed then the cash flow difference is only 5 to 15 days from the supposed “2% if paid in 10 days” and there is no need for a loss of 2%.

The author has used this A/R method for years to take companies from 60 to 90 days A/R collection to 20 to 30 days. Put an actual date when it’s due and call to follow-up.

A/P Financing

You can use account payables (A/P) as a means of financing for your business. You can usually go to 45 days and no one will scream at you.

Topics on Financial value increase tools to follow include:

Financial Qualitative Performance

o Cash Flow

o Valuation Metrics

o Performance Dashboard

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