Part IV Increase Company Value

Accounts Receivable and Payable Cash Flow Optimization

Part IV Increase  Company Value. 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 additional financial metrics different from the traditional bank financial ratios and metrics.

A/R Days  –  A/P Days 

How many companies have invoices at “NET 30 DAYS” or “2% NET 10”?

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

EXAMPLE:  The invoice is dated on the 1^st of the month.  The A/P clerk receives it on the 3^rd or 4^th.  It says net 30 so it goes into the next month’s 3^rd or 4^th bin but what if checks are only paid on the 15^th and 30^th so it goes into the 15^th bin.  It is processed on the 15^th, mailed and the payment is received on the 20^th.  THE 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 1^st make the due date the 11^th.   THEN call between the 7^th to the 10^th 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.

For 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
  • Cash Flow
  • Valuation Metrics
  • Performance Dashboard