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'Payback' on investing in a systematic way to collect Debtors Cash sooner

The right level of 'payback' should make it a 'no-brainer'!

In the previous post on the topic of cash collection and old manual versus new and semi-automated collection methods, we mentioned 'Payback' (to the Accounting Practice) on the investment in technology-based systematic collection methods.

The Comparison Chart below sets out the differences between the Cerebiz systematic collection method covering ALL outstanding invoices and two other methods, Reminder sending as one and Invoice Funding as the other, that each cover only a part of a Practice's invoices unpaid.

Collection of outstanding invoices NOT covered by Reminders that result in a payment or by Invoice Funding (line items shown by a '?' or 'No' in the Comparision Chart) involves manual operation(s) that have hourly rate costs as well as the cost of delay in collecting on the invoices.

The Hourly Rate costs and the Cost of Delay in cash collection can put much pressure on a Practice, in particular, if the Debtor Days number keeps growing or the Practice is growing in terms of the number of Clients or size of Client or both.

If the Practice (like any other business) provides credit terms for its Clients, it has to fund the provision of that credit. If the Practice's Clients pay late, i.e. beyond the payment terms agreed with the Practice, the debt grows even more extensive.

Let's look at the Manual collection costs first. Practices report one to two or more hours per day spent on manual collection methods. That amounts to 20-40 hours a month at a rate upwards of $40/hour puts the minimum cost of manual operations at between $800 and $1,600 per month. If Managers and Partners get involved at any stage in the collection, the cost figures will grow.

Now, let's look at the cost of delay in collection for a case where the Practice has $1million in annual fees and at any one time has to fund a total debtor figure of $150,000. The impact of this shows in the blue section of the Debtor Days Chart below.

The blue section shows a Debtor Days figure of 55 Days which is the average for SME business in Australia.

Looking at the bottom part of the blue section shows that reducing the Debtor Days by ten days would release $27,397 back into the business as extra working capital as Cash at Bank instead of owed by Debtors. Where would you rather see it? What if you can get back to 30 Debtor Days?

The black section enables you to put in your figures, in this case showing $3million annual fees and $600,000 in Debtors. Cerebiz regularly comes across Practices with numbers like this and worse.

What if the 73 days could be brought back by using a systematic and semi-automated method to 43 Days? Does an increase in Cash at Bank of $246,575 sound attractive?

Conversely, if you started as a smaller Practice and grew the business to $3million still using manual collection methods, you may end up at 73 Debtor Days and have to find around a quarter of a million dollars to fund the Practice's slow cash collection.

You know your situation. If your Debtor Day number is too high, you'll be spending significant dollars on manual collection methods as well as having to fund the credit that is beyond your trading terms!

Bringing in a systematic and semi-automated method to avoid/eliminate these costs is a 'no-brainer' on the based on the figures achieved by Practices that have adopted the new methods to collect cash.

They show the one-time implementation cost of the new method is recouped many, many times over by the cash returned into the business, i.e. the increase in working capital. And the subscription cost is covered many times over by the cost savings by eliminating the manual operations involved without automation.


Peter Vroom

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