Your Accounts Receivable – Is 150 Days the New 30 Days?
Here are the most recent excuses or reasons debtor companies are using for not paying vendors on time:
- Your invoice is not in the format we need for our payable system
- Our new company policy is to pay 90 days from your due date
- Customers are not paying me on time so…
- Pay when paid contract clauses
With banks only lending against receivables that are 60 days old or less, having customers stretch their payment to you, can put tremendous pressure on your cash flow to meet basic expenses or take advantage of opportunities. To make sure you are receiving the best return on your asset (receivables), we recommend assessing your receivables for optimal performance.
There are several ways that you can quickly measure the health of your account receivables. In this article we review how your company’s Balance Sheet can reveal the negative trending of your financial performance and accounts receivables value. Here are some simple tests that you can do right now to test the financial health of your company and its accounts receivable:
Days Sales in Receivables
This measure will tell you how many days, on average, it takes for you to collect your money. A number that is close to the number of days within your credit terms: (i.e. 7 days, Net 30 days, etc.) is considered to be exceptional, whereas numbers in excess of fifteen days past your due date (15 days past 30 day due date = 45) should be cause for alarm! Accounts that are 60 days delinquent can no longer be used as security on a business loan from a financial institution.
Formula = Gross Receivables/Annual Net Sales/365
The probability of collecting from a customer that is 90 days past due, goes lower every day.
Accounts Receivables Turnover
This calculation will tell you the liquidity of your company’s receivables.
Formula = Net Sales/Average Gross Receivables
A low number of days are good; however a higher number would indicate reduced cash flow and perhaps increasing cost of borrowing.
Accounts Receivable Turnover in Days
This measurement will give you and indicator of how quickly you can convert your receivable into cash.
Formula = Average Gross Receivables/Annual Net Sales/365
A number close to your credit terms is excellent, whereas a higher number will indicate areas for improvement to your receivable management processes.
By closely monitoring your accounts receivable, you can quickly jump on payment delays before they become real problems.