How fast is your cash travelling?

The trading terms we negotiate both with our customers and suppliers has a big impact of the cast flows of our businesses. In most cases, depending on your industry, that typically is around 30 days from invoice, but do you actually track your time to collect, or days sales outstanding (DSOs)?

If you are like many companies you have the potential to increase the velocity of your cash with the resultant increase of working capital for your business. Let’s look at a scenario….

A wholesale distribution company has a turnover of $50m per annum and offers its customers 30 day terms. If we work on the basis of even sales throughout the year, and if they collect their cash in 30 days they would have $50m * 30/365 = $4.1m in accounts receivable at any one time. What are yours?

As we all know for many reasons companies with 30 day terms generally have DSOs of 45 days or greater. Now imagine if you could unlock some of this cash to put back into working capital or perhaps reduce funding costs. The sums look like this…. In this case accounts receivable is now $50m * 45/365 = $6.16m an increase of $2m over your terms. What impact would this have on your working capital needs also with funding costs of say 9% per annum that’s another $180k you could be saving.

The question you might now ask is how do I unlock these savings and release this working capital back into my business. The answer will vary from company to company and will involve a number of activities and improvements of business processes such as better control of receivables, dunning processes on overdue accounts, improved accuracy of the ‘order to cash’ process as well as potentially moving some customers to cash/credit card only. Today many of these activities are well suited to be enabled by eCommerce solutions.

Some of these are:

• Moving customers to your web channel and moving to credit card checkout.
• Messaging services such as order confiormation, advanced shipping notices,
• And of course invoice automation

Over the last 18 months Commerce Vision has continued to invest in solutions that enable ‘order to cash’ and ‘procure to pay’ business processes that can have a material impact on improving the velocity of cash in organisations.