Extending payment terms to your B2B customer has been proven to increase customer loyalty, order size, purchase frequency and strengthen supplier relationships. Although extending payment terms creates dramatic growth for customer lifetime value, it also can be a massive burden for companies to manage.
A long payment period can cause havoc on a company's cash flow, the ability to pay debts, and even value. To see how big the issue is, Apruve took a deep dive into the how efficiently the United States is getting its money from its customers; showing the average payment period from multiple locations and industries.
How does your company compare to the rest of the state, industry, or national average?
If your organization has a lot of receivables on the balance sheet maybe it is time to consider its repercussions:
When cash comes in slow, organizations commonly do not have the cash on hand to pay off current liabilities. A cash predicament is bypassed with cash forecasting, but with unpredictable income, that comes with having accounts receivable, forecasting the cash your business has on hand at a particular time may be near impossible. It should be an aim to lower your average payment period and add consistency to your receivables to help to forecast accuracy.
2. Value of your businessFree Cash Flow plays a significant role in a businesses value. When a business has outstanding receivables, the credit sales do not count toward the evaluation, as a receivable is not cash collected, taking away from perceived value the organization is making.
3. Revenue driving capital
Waiting on payment should be seen as waiting to invest and grow your business's value. If your accounts receivable were available today, how much money could you potentially generate through using that capital in operations or financing? This value can be calculated by:
((Total Credit Sales * Interest)/356) * DSO (Days Sales Outstanding)
If your payment period has room for improvement, consider working with Apruve. Apruve takes away the burdens of extending terms by paying companies within 24 hours of invoicing, eliminating financial risk and increasing forecast accuracy. With Apruve, businesses can focus on driving sales and value instead of worrying about when they are getting paid.