"Companies don't always grasp the importance of faster collection of outstanding receivables," notes Les Kirschbaum, president of Mid-Continent Agencies, an accounts-receivable-management business in Rolling Meadows, Ill. Instead, managers focus corporate resources on boosting sales, because the benefits of higher revenues are easier to quantify. Collection inefficiencies or problems are often ignored by executives who don't know how to assess their cost to the company's bottom line. "But it's possible to quantify the benefit of faster collection in terms of dollars saved," says Kirschbaum. Here's how to do it: by following the formula below, you can calculate the dollar savings from each day's improvement in the speed of your average accounts-receivable collection. Faster collection means that your company won't have to use its credit line (or your own credit cards, for that matter) while waiting for customers to pay up.
Post the formula on your company's bulletin board so that no one -- least of all you -- can overlook the benefit of a swift, efficient collection system. Once you know exactly how much your company stands to gain from faster collection, you can see if it's worth investing in top-notch collection software, say, or even hiring a full-time accounts-receivable clerk. When looking for ways to collect receivables faster, take note of every possible source of improvement. "Many executives assume that the only way to boost collection is by hounding their customers more often. But they can save days in a lot of different ways," notes Kirschbaum. "You can often improve collection just by changing your terms and conditions of payment. So remember that you've got a range of options, all of which can have a positive impact."
(Gross annual sales x annual interest rate) x days saved 365 = dollar savings
A. Use last year's sales numbers, unless your company is growing rapidly and you've got a good projection for this year.
B. Mid-Continent tends to plug in the prime rate for "annual interest rate," which was 8.75% at press time. Companies with higher borrowing costs should use prime plus 1 or 2 points.
C. To find "days saved," subtract your company's improved days sales outstanding (DSO) from its original DSO. If you don't know how to figure your DSO, here's a quick calculation:
Average accounts-receivable balance over past 3 months x 90 Total sales over past 3 months = DSO
D. "Dollar savings" is the number you care about. Look for ways to keep generating new dollar savings from whatever improvements you can make in your collection system.
Here's the best news of all: no matter how small your company or its DSO improvements, you can still save money. A $10-million company, borrowing at the prime rate, that makes its collection four days faster would save $9,589. A $3-million company that improves its DSO by 15 days -- a realistic goal for companies that haven't actively managed their collection effort -- would gain $10,788.
A $5-million company, borrowing at the prime rate, improves its days sales outstanding by five days.
($5,000,000 x .0875) x 5 365 = $5,993 in savings