As a follow up to this post, I thought I would provide a real world example of a client that has improved their cash collection by 25% in the past year.
How do I know this? One of the analytical tools we use to advise clients is the “Days sales in Accounts Receivable” ratio. It is computed by taking accounts receivable divided by net credit sales/360 (basically your daily sales is the denominator).
Our client went from a figure of 45 days in accounts receivable at 12/31/08 to 33 as of 12/31/09. That means in 2008, they had a month and a half worth of cash sitting there uncollected. Meanwhile, they still had to pay bills, payroll, etc. By the end of 2009, they were down to just over a month’s worth of sales, basically everything billed in December was not collected. That’s a 25% improvement – incredible!
How did they do it? I inquired of their accounting personnel and she informed me they aggressively pushed their customers towards automatic payment or paying with a credit card. So not only do they get paid faster, they don’t have to mess with taking checks to the bank – a time saver anyone would love. A side benefit of this is paying their vendors quicker to take advantage of early payment discounts.
I love sharing stories like this! Please tell me what you’ve done to improve your business so others can learn from it.
