The age of a company’s receivables is determined by dividing its average sales per day into the receivable balance. Credit sales are used in this computation if known but the total sales figure often has to serve as a substitute because of availability. The sales balance is divided by 365 to derive the amount sold per day. This daily balance is then divided into the reported receivable to arrive at the average number of days that the company waits to collect its accounts. A significant change in the age of receivables will be quickly noted by almost any interested party. age of receivables = receivables/sales per day If a company reports sales for the current year of $7,665,000 and currently holds $609,000 in receivables, it requires twenty-nine days on the average to collect a receivable. sales per day = $7,665,000/365 or $21,000 age of receivables = $609,000/$21,000 or 29 days As a practical illustration, for the year ended January 30, 2009, Dell Inc. reported net revenue of $61.101 billion. The January 30, 2009, net accounts receivable balance for the company was $4.731 billion, which was down from $5.961 billion as of February 1, 2008. The daily sales figure is calculated as $167.4 million ($61.101 billion/365 days). Thus, the average age of Dell’s ending receivable balance at this time was 28.3 days ($4.731 billion/$167.4 million).
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Question: If company officials notice that the average age of accounts receivable is getting older, what type of remedial actions can be taken? How does a company reduce the average number of days that are required to collect receivables so that cash is available more quickly? Answer: A number of strategies can be used by astute officials to shorten the time between sales being made and cash collected. Below are a few examples. Unfortunately, all such actions have a cost and can cause a negative impact on the volume of sales or create expenses that might outweigh the benefits of quicker cash inflows. Management should make such decisions with extreme care. Require a tighter review of credit worthiness before selling to a customer on credit. If sales on account are only made to individuals and companies with significant financial strength, the quantity of delayed payments should decline. Work to make the company’s own accounting system more efficient so that bills (sales invoices) are sent to customers in a timely manner. Payments are rarely made—even by the best customers—before initial notification is received. If the billing system is not well designed and effectively operated, that process can be unnecessarily slow.  Offer a discount if a customer pays quickly. Such reductions reward the customer for fast action. Send out second bills more quickly. Customers often need reminding that a debt is due. An invoice marked “late” or “overdue” will often push the recipient into action. A company might send out this notice after thirty days—as an example—rather than wait for forty-five days.
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