Lost & Found – Quicker Collections, Quicker Profit

In this Lost & Found, we will look at the problems you encounter with your AR Collections and how it affects your cash flow and your profit. Even in good times, many customers are slow to pay. With the current economic situation, you may see collection times lengthening even more as your customers begin to conserve their cash.

Many companies’ collection process consists of reviewing customers with past due balances on an aging report at month end. Time is needlessly spent looking at all the current AR trying to find what is past due. Calls are then made to collect these balances. Invoices that became past due early in the month, may already be up to 30 days old.

What would the benefit be if you could reduce the days of outstanding past due balances? With tools such as an automatic alert, you could be notified every morning of the past due invoices as of that day. This could greatly reduce the time it takes to collect the cash that is due to you.

There are many other ways to improve your cash collections, but how does that affect your bottom line? Fill in the blanks below and see how much your company can increase your profit by improving your cash collections.

Variable	Example	Your Business
Current Annual Sales	$2,000,000	$
365 Days Per Year	÷ 365
Average Daily Sales	$ 5,479	$
Current Days Outstanding	x 60
Total Current Cash Outstanding	$ 328,740
Average Daily Sales	$ 5,479	$
Anticipated New Days Outstanding	x 10
Anticipated Cash Outstanding	$ 54,790
Total Current Cash Outstanding	$ 328,740	$
Total Anticipated Cash Outstanding	- 54,790
Total Improved Cash Collections*	$ 273,950*
Annual Return (Current Prime Rate)	x .07
Improved Annual Profit	$ 19,177	$

*This is additional cash that will be liberated from your AR.

Lost & Found – Dollars Lost in Inventory

In this Lost & Found, we will look at optimizing your inventory turns to reduce the amount of inventory on hand. An item whose inventory is sold (turns over) once a year has higher holding cost than one that turns over twice, or three times, or more. Increasing inventory turns is beneficial in three main ways:

• Reduce your holding costs so you spend less money on rent, utilities, insurance, theft and other costs of maintaining a product. This reduction in overhead costs will improve net income.

• Free cash trapped in excessive inventory by optimizing your on hand inventory.

• Items that turn over more quickly increase responsiveness to changes in customer requirements while allowing for the replacement of obsolete items.

There are many other ways to optimize your inventory besides increasing your turns. Fill in the blanks below to see how much your company can increase your profit by improving your inventory turns.

Variable	Example	Your Business
Annual Cost of Goods Sold	$1,500,000	$
Average Current Inventory Value	÷1,000,000
Current Inventory Turns	1.5
Annual Cost of Good Sold	$1,500,000
Anticipated Improved Turns	÷ 6
Anticipated New Inv. Value	$ 375,000
Average Current Inventory Value	$1,000,000
Anticipated New Inv. Value	- 375,000
Total Inventory Reduction*	$ 25,000*	*
Carrying Cost (10% industry average)	x .10
Improved Annual Profit	$ 62,500	$  _

* This is additional cash that will be liberated from your excess inventory!