Turning slow payments into faster funding.
The Johnsons' educational materials side business experiences inconsistent payment timelines. While some customers pay invoices promptly, others take 60-90 days. This delay ties up capital, hindering their ability to reinvest in new designs, manage inventory effectively, and allocate funds to their children’s growing educational needs. They need to understand how long on average it takes to collect revenue.
Using the Average Collection Period Calculator, the Johnsons discovered their average collection period was 75 days. By implementing stricter payment terms, automated invoicing, and offering early payment discounts, they aim to reduce this to 45 days, freeing up capital for reinvestment and family expenses. Additionally, the Tax Equivalent Yield calculator was used to compare the returns of investing freed-up capital versus the cost of financing operations during the extended collection period.
The advisor input the Johnsons' annual credit sales and average accounts receivable into the Average Collection Period Calculator. Then, they leveraged the Tax Equivalent Yield calculator to illustrate the potential earnings from reinvesting freed-up capital compared to alternative investments.
$12,000 increase in annual operating capital by reducing collection period.
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