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Accounts Receivable Costs There are
four major costs associated with accounts receivable: bad debts, interest,
opportunity costs, and miscellaneous costs. Bad Debt
Value: The National
Association of Credit Management has estimated that each dollar of accounts
past due is worth the following:
Interest: What does
it cost to carry past-due accounts? If a 5 percent net profit is realized
on sales, for every $100 accepted in credit, $95 is paid for product,
expenses, taxes, and so on. Interest alone can erase the $5 profit in
a short period of time: Interest
Costs at 12% Per Year:
Opportunity
Costs (e.g., Alternate Use of Capital): Consider
an example using a yearly sales figure of $12,000,000 or $33,000 per day.
If the accounts receivable investment improved and the number of DSO decreased,
the following amounts could be released or added to cash flow: by three
days - $100,000; by six days - $200,000; by thirty days - $1,000,000.
The funds could be used for keeping up with competition (for example,
expansion or new product development) or internal improvements (such as
salary and overhead increases). Miscellaneous Costs include: Losing the
ability to discount (a crucial cost, especially in a high-interest period);
paying penalty/late charges (in addition to the possibility of restricted
credit); increased risk factors (the older the debt, the harder to collect);
maintaining administrative, bookkeeping functions; letters of credit fees.
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