Interactive WONDERMENT® Projects
Follow the instructions below to take an accurate look at how your Accounts Receivable carrying costs really affect your bottom line! Click here if you prefer a one-page document in PDF format. (355K)
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Figuring Accounts Receivable Carrying Costs
Does your selling price include the cost of carrying the accounts receivable? Where is your cash currently tied up? Look at your total uncollected sales and A/R. Imagine it as a large lake in which huge amounts of cash can be trapped. The longer the cash sits there, the harder it is to collect and the more it costs you (see chart at right). The faster you can collect your A/R, the better the impact on your bottom line.
WONDERMENT® Project Steps:
Fill out the following table for one of your accounts receivable ...
Example: Douglas' Motor Company
Douglas’ Motor Company had a $5,000 account that was 180 days old. The cost of carrying the A/R was determined to be 25% annually. After applying the A/R costs, the $5,000 was reduced by $625.00. DMC worked on a 20% markup, and 62.5% of the profit was lost.
What Questions Does This Raise?
Can you afford an extra 10-12% of costs?
Can you expedite the processing of receipts and accelerate the collection of funds?
Does it make good business sense to offer a trade discount and/or a penalty for late accounts?
accounts receivable? Where is your cash currently tied up? Look at your total uncollected sales and A/R. Imagine it as a large lake in which huge amounts of cash can be trapped. The longer the cash sits there, the harder it is to collect and the more it costs you (see chart at right). The faster you can collect your A/R, the better the impact on your bottom line.