When it comes to credit control and working capital, time is critical. More often than not, days and weeks are allowed to pass without actions being taken to get results. As you’ll see in the other articles in this Smart Cash Flow Programme, there are very simple ways to use time more effectively and reduce your reliance on banks or other sources of working capital.
Reducing your reliance on external working capital will not necessarily remove it altogether, particularly as your business grows. In many cases, a continuously growing business will always have a demand for alternative working capital. Using the DSO and WADSO methods in this Smart Cash Flow Programme will help.
The purpose of this article is to demonstrate how a simple understanding of time can reduce the cost of your working capital, particularly when using Credebt Exchange®. When you issue and invoice/ETR it has a date on it, this is the Issue Date. When you upload this ETR to the Exchange, you must enter the Expected Date. This is the date that payment is most likely to occur. The number of days between the Issue Date and the Expected Date. The Expected Date, minus the Issue Date is the Day Sales Outstanding, or DSO, value. This DSO value is used to calculate the Discount that will be charged on the Face Value of the ETR.
Expected Date – Issue Date = Day Sales outstanding/DSO
For example, an ETR with a Face Value of € 10,000 with a Revolving ETR Sales Agreement, or RSA, of 1.000% per month and a DSO of 30-days, means that the Discount charge will be € 100.00. The same value ETR with a DSO of 60-days, means that the Discount charge will be € 200.00. This is double the cost of the previous ETR. Therefore, if your DSO is moved from 60-days to 30-days, you will reduce your finance costs by 50%. Time is, most definitely, money. Time is very important.