Outstanding Cash – How much is too much!

Most businesses do not measure the accumulation of late paying clients (outstanding cash).

In business, we all know “Cash is King”. It always has been and always will be.

Why then do so many companies still focus primarily on growth and profit, rather than on working capital (cash). Sure, profit is important, but positive cash flow is what keeps the company going and growing.

In 2017 businesses should have all learned that lesson. A lack of working capital was the primary “cause of death” for many of the worlds dot-coms failures in the early 2000s. Likewise from 2008 onwards when cash flow triggered the bankruptcies filed during the Global Financial Crisis.

If we learn from history the lesson must be that the primary focus of ANY business should be positive cash flow management.

Some typical cash flow leakage points or traps include:

  • Cash sitting in non-interest bearing accounts
  • Unnecessary or under-used inventory
  • Fixed assets: buildings, equipment, cars, etc.
  • Loans to shareholders, employees, affiliated companies
  • Uncollected sales (accounts receivable)

If we look uncollected sales, we have some real examples below of businesses who improved their cash flow and “debtor days” – sometimes called DSO for Days Sales Outstanding (DSO).  This shows you the huge amounts of extra cash businesses can access if they improve their accounts receivable process.

Manufacturing & Distribution

Turnover: $3,000,000.00
Historic Debtor Days
120 Days - $ 1,084,931.51
Debtors 18 months Later
53 Days - $ 479,178.08

Missing Cash Returned
$605,753.42

 

Accounting Firm:

Turnover: $3,600,000.00
Historic Debtor Days
60 Days - $ 797,837.86
Debtors 18 months Later
29 Days -$ 260,814.00

Missing Cash Returned
$537,023.86

 

Tips to Reducing Slow Payers

As you can see, eliminating slow payers has a tremendous impact on cash flow. Reducing slow payers, even slightly, can go a long way toward improving the health of your company.

The next step, of course, is to find ways to reduce slow payers.  Start by looking at each of the four main parts of credit management for clues to finding holes that need to be plugged.

  • Credit Approval Process
  • Invoicing Process
  • Receivables Management
  • Bad Debt Collections

Use the smartAR extra cash calculator to find out how much extra cash your firm could gain if you plugged all the gaps. Then call us to find out how we can help your business get paid… faster.

Click here!

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