Monday, October 23, 2006

Improve Cash Flow through Accounts Receivable Outsourcing

Businesses of all sizes focus each day on how to improve cash flow and deal with the challenges of having too much of their cash flow tied up in working capital. As I wrote in September, money tied up in working capital is money not available to grow the business.

So how do you reduce working capital? The most obvious step a company can take is to collect your accounts receivable faster. Easier said then done? Maybe it’s time to get some help. Let me tell you about a conversation I had last week with Neal Gold, Corporate Vice President for STA International, on how to improve cash flow through accounts receivable outsourcing and improve your bottom line. Here’s what Neal said…

Business process outsourcing (BPO) continues to gain momentum as more businesses recognize tangible benefits from outsourcing non-core processes. Operational cost advantages and greater economies of scale, resource utilization efficiencies, enhanced risk management and improved employee morale were all cited as outcomes of effective outsourcing relationships.

An area of business process outsourcing which is getting greater attention is that of accounts receivable outsourcing. More companies, frustrated by lost revenue and related profit opportunities, are increasingly exploring new ways to manage their receivables.

From a customer retention perspective, accounts receivable outsourcing works to sustain and build better customer relations, rather than allowing a contentious situation to arise.

Neal claims that businesses that make a commitment to accounts receivable outsourcing will not be disappointed. Strictly from a financial standpoint, businesses using accounts receivable outsourcing will achieve faster receivables collection, reduce bad debt write-offs and lower debt recovery costs. Companies using accounts receivable outsourcing typically realize improved cash flow by up to 30% on their outsourced receivables resulting in reduced borrowing and lower interest payments.
Let me put that into perspective for you. If your company is borrowing at 9% and can reduce its average days sales outstanding (a common benchmark for measuring effectiveness at collecting your receivables) by even as little as 10%, then you can reduce your annual interest expense by $9,000 for every $100 thousand of accounts receivable you typically carry. Reduce your average days sales outstanding by 20% and the projected annual savings are $18,000. That’s an improvement in cash flow that goes all the way to the bottom line!

If your accounts receivable are eating up precious working capital, give me a call and I’ll put you in touch with Neal.

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