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explaining time value of money in an ar transaction

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  • #24705

    Sneed
    Member

    I am trying to explain to sales force and collections agents. how each day past the terms of net 30 a customer goes past the due date it negatively effects the roi.

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    #59219

    Brandon
    Participant

    Tiffany, you are correct in that it is based on the time value of money – do they really not understand that?
    Any delay in receipt of monies due your firm means your firm must fund operations from other sources – revolving lines of credit, bank drafts or any other form of borrowing. These money sources have costs associated with them – the most easily explained are loan fees and interest. Althought there are other costs more complicated and not worth going into.
    If your receivables are, say, $100K less than industry averages for receivable aging then your firm is having to find $100K from other sources. The cost of these funds is your marginal cost of capital (your acctg dept should be able to give you this number and your marginal cost of capital is usually higher than your firm’s overall cost of capital) multiplied by the excess in receivables.
    In this case let’s say your marginal cost of capital is 15% and excess receivables are $100K. Therefore the receivables financial opportunity cost is $15K per year.
    If the people you are trying to explain this to still don’t get it – I would like to borrow money from them and pay it back in 4 or 5 years (without interest of course).

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    #59222

    Adam Bowden
    Participant

    I agree with Brandon on this. COC varies from company to company
    and is typically in the range of “base plus 2” to 25% depending upon
    the investment strategy for cash flow.Adam

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