Having sales and profits is great, but having cash flow is even better. Many companies forget about this important nuance in business. Many bankruptcies in businesses boils down to the fact that they are struggling with their cash flow. This means that these companies are ultimately struggling with their accounts receivable, since they have sold on credit terms, but have yet to see that cash from their customers.
So, ultimately, the way to combat this is to decrease the amount of time it takes you to get paid. A common way that many businesses look at this is through days sales outstanding, or DSO. By decreasing your DSO, you’re less likely to have to take out a line of credit to support your own business. Unfortunately, customers often take advantage of payment terms since it is essentially an interest free loan. This is why introducing an automated accounts receivable software is so crucial to keeping your DSO low and your cash flow high. The software will continuously reach out to and remind customers to make their payments, among many other features, helping you to get paid on time.
So, how much will you save by using automated accounts receivable software? Below is an example calculation, which you can easily fill in with your own data, to decide what the ROI of A/R software is.
AUTOMATED ACCOUNTS RECEIVABLE SOFTWARE ROI CALCULATION
The following calculation is based on an example company, ABC Enterprises, with $500,000 in annual credit sales and an average DSO of 60 days. Additionally, calculations will use a 3.25% interest rate.
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This means that is costs ABC Enterprises $2,671 in interest every 65 days to extend credit to their customers.
Find out how much cash flow you have trapped in your receivables
It’s important to know what the average DSO for your industry is when looking to reduce your DSO. This is a good benchmark to start at. For example, we’ve discovered that ABC Company’s DSO should be at 45, not 60. Now, we can see how much is trapped in receivables if we were to reduce our DSO.
In this step, we see that ABC Company has a total of $20,535 invested in excess receivables and $667 in annual interest, resulting in a total of $21,202 of cash flow stuck in their receivables.
How reducing DSO will affect your cash flow
Will do the same calculation from above, but with a reduced DSO to 50 days.
With a reduced DSO, ABC Company has a total of $6,845 invested in excess receivable and $222 in annual interest, resulting in $7,067 of cash flow stuck in receivables. This is a $14,135 annual reduction in costs by reducing DSO by just 10 days.
Using an automated accounts receivable software, most companies see a reduction in DSO by 20 percent in their first six months. By implementing an automated accounts receivable software to increase your touches with customers, encourage and remind them to pay on time, record and transcribe phone calls and keep the A/R team organized, ABC Company will see an ROI of $14,135.