AAB’s Blog for Commercial Creditors

The cost of carrying receivables can have a significant impact on a company’s bottom-line.  Paying lenders to cover expenses without collecting interest on receivables is a financial burden.

Business savvy accounts payable departments hold invoices as long as they can to earn interest income.  Most small businesses won’t pursue interest charges for many reasons.  The most prominent reason is they are scared to jeopardize their relationship.  Often, this fear minimizes profits and forces companies to borrow against a line of credit.

Companies that borrow against a line of credit bear the burden of paying interest to their lender.  Not only are these companies paying interest, they are losing out on the opportunity to gain interest or invest back into their company.  The combination of this actual expense and the lost potential gain can lead to a significant decline in profits.

To calculate the cost of carrying receivables over a year you must know your Days Sales Outstanding (DSO), interest rate and credit sales for the year.  The formula is:

 ((receivables x interest rate)/365) x Days Sales Outstanding

 Take the time to calculate your cost of carrying receivables and think of ways for lowering DSO to minimize this expense. 

 Days Sales Outstanding plays a major role in the accounts receivable carrying cost.  It is part of the equation that can be improved.  By lowering DSO, money is saved.

In the next post, I will offer simple steps to improve DSO. 

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