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Quantifying Savings from Cash Generation

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  • #42580

    Derek Smith
    Participant

    If a company has outstanding receivables of $100m, of which $50m are overdue (ratio 0.5) before, and after the figures are $80m and $20m respectively, any ideas on the best way to quantify hard savings?
     So far I have assumed that in applying the baseline ratio to the new receivables figure, we would expect that if nothing had changed, there would be $40m outstanding. It is actually $20m so there is a $20m saving (soft).  Cost of Capital is one way, but how do you know over which period to apply the interest rate? Would this require a look at the balance sheet to see a normalised increase in funds available. But would then need to correlate this to the change in overdue monies.
    Any thoughts appreciated.

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    #134546

    AB
    Participant

    Derek
    In effect what you are trying to do is obtaining control of receivable monies earlier than before. So there is bottom line benefit only if you can either
    a) Payoff outstanding term debt
    b) Invest the money in instruments that will yield positive return
    c) Re-invest the money into the organization
    d) Finance the operating capital needs without using line of credit
    e) some others types of benefit I am not currently thinking of
    The measurement of savings aren’t just linked to reduction in outstandings but also with what you do with the extra cash. I would look at the most likely use of that money to see what the hard savings are. You can conjecture on the possible use looking at the balance sheet and argue that the money could be used to pay off a certain debt and calculate the benefit or if there is no term debt, you could look at reducing cost of working capital
    Hope this helps
    AB

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