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Usually, businesses have receivable or those what the customers owe to you. Difficulty collecting payments from these receivables can affect your outstanding accounts as it will bleed out your cash flows. Late payers of receivables are in fact lending your money while being free from interest rates.

Unknowingly, the failed payment of receivables gain the business cost which are not obvious. The uncollected receivables could have been placed in money market instead. Or, these receivables cost you to miss other opportunities which might give you additional income.

Every business must be aware of their receivables or the customer’s credit profile. Dividing the sum of the credit sales to the average receivable balance is the first step to do to identify your average collection period. To better explain this, look at the example.

• If you have a total sale of 4.5 million with 3.5 million of it on sales account. Then you have 6.5 million as receivable account at start of the month and at 4.5 million at month end. This is how you can compute for your receivable turnovers.

3.5M (sales on account) / 5.5M (starting receivable account (6.5M) plus month end receivable account (4.5M) divided by 2.

The result from this will be 0.6. Divide the number of the months by the result that you get to determine your average collection period days.

30 days / 0.6 = 50 days (your average collection period.

If you have a normal credit term of 30 days subtracted from your actual collection average collection of 50 days, you will have 20 days collection overdue. Multiply this by your daily sales to come up with your total uncollected accounts receivable.

20 x 116666(3.5M divided by 30 days) = 2,333,333(uncollected account receivable)

By multiplying that figure with by the normal rate of return from your business, the amount you will come up with is the cost of the overdue accounts.

Shortening the average collection period will make you manage your cash flow better. To decrease your credit sales, you can apply a stricter credit policy. You can also strengthen your collection efforts to lower your receivable balance. Prioritize your collection efforts focusing more on small accounts with its higher possibility of being collected. Legal actions can be taken against customers with uncollected overdue account.