Proof that Time = Money

Would you prefer to get paid today rather than Net30? Of course! Positive cash flowfunds your operations and growth. Amazon is a shining example of how powerfulit can be. And on the flip-side, it is well researched that the lack of workingcapital is the main reason for bankruptcies. Receipt of cash is the fuel of abusiness so each of us should make time-to-cash a priority. But how big apriority? What is the impact of time on cash, profits, and valuation? Does timereally equal money? Yes!

Ascompanies, we extend credit in the form of payment terms that define timing,payment method, and other criteria. Most of our practices are based onpre-digital approaches, established while using the postal network.Consequently as suppliers, we extend credit based on invoicing, collections,and cash application that is antiquated and slow. (See my previous post aboutantiquated terms.)

Howmuch do antiquated receivables costs? You can calculate it easily. The timecost of deliverables is the interest per day the cash would impact your companymultiplied by the average days to collect the cash (days sales outstanding orDSO). The numbers you need are your annual receivables amount, average DSO, andan interest rate, e.g., prime rate or line of credit.

Thetime cost of receivables is calculated as follows:


time cost = (annual receivables * interestrate)*DSO/365


Forindividual companies, how does that add up? Well if a company is $50M inrevenue, the time cost is $337k. For $100M, it 674k. At $500M, it is $3.7M. Andat $2.5B, time cost is $16.85M.

Whatwas the time cost in 2017 for the United States? Over $60 billion dollars. TheUS had a GDP of $19.38T of which 45.5% was sold on credit with an average DSOof 61 days and an average prime rate of about 4.1%. Using the equation fromabove:


$60.4B = ($19.38T * 45.5% * 4.1%) * 61/365


Soyes, DSO proves that time does equal money. The time needed to collectreceivables is real money and real opportunity cost. The time cost ofreceivables could be investment into personnel, capital to grow, or profits toshareholders. Reducing DSO, even a little bit, can have a significant impact oncash flow and profitability. Accounts receivable optimization does exactlythat. To reduce the time and cost of getting paid, you should be ensuring:

·        Timelyand accurate delivery of invoices

·        Clearpayment terms and incentives

·        Responsivedispute resolution

·        Automateddunning

·        Integrationwith your customers’ accounts payable

·        Continuouslearning of sources of late payment (e.g., disputes)


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