The Cost of Uncollected Receivables

L. Douglas Mault

April 2007

This outline assumes a company with sales of about $3,100,000 per annum with what seems a modest amount of receivables to be collected. The series of calculations is one approach, and guideline, as to how to evaluate Accounts Receivable in a measurable, comprehensible and meaningful way.

The sequence is to calculate Days Sales Outstanding, a commonly used guideline. Then one calculates the Ideal DSO.The difference between the DSO and the IDSO gives rise to the Delinquency Factor from which one calculates the Delinquent Average Daily Sales. This then leads to the final calculation of the Cost of Uncollected Receivables expressed in the additional daily sales that are needed to offset this cost.

DAYS SALES OUTSTANDING CALCULATION GUIDELINES

Balance of A/R $594,180.50 100.0%

Less:
Current Billings (370,787.70) 62.4%
Accounts in Litigation (30,372.10) 5.1%
Special Terms (72,960.60) 12.3%

Balance of A/R Delinquent
and Uncollected: $120,060.10 20.2%

FUNDS INVESTED IN DELINQUENT ACCOUNTS RECEIVABLE
Days Sales Outstanding is calculated as follows:

Average of all receivables for prior 3 months end X 90
Total credit sales for those 3 months 598,980.20 X 90 = 53,908,218.00 = 48.36 DSO
1,114,780.80

Ideal DSO is calculated as follows:
Average current receivables for prior 3 months X 90
Total credit sales for those 3 months

455,662.00 X 90 = 41,010,030.00 = 36.79 IDSO
1,114,780.80

DETERMINING THE DELINGQUENCY FACTOR

DSO 48.36
(IDSO) (36.79)
DF (Delinquency Factor) 11.57

ADS (Average Daily Sales) of $ 12,386.50 (based on sales of approximately $3.1 million per annum)

Delinquent Average Daily Sales
DF X ADS = DADS

11.57 X $12,386.50 = $143,311.80 DADS

DADS X Current Cost of Carrying
Interest Rate = Delinquent Receivables

$143,311.80 X 10.25% = $14,689.46 Annual Cost
$14,689.46 ÷ by 365 = $40.25 per day*
$14,689.46 ÷ by 250 = $58.75 per available selling day**

Assuming an average pre-tax profit margin of 7.5 percent, then

*You must sell $536.70 extra, every day of the year.

**You must sell $783.35 extra, every selling day of the year, to accounts that pay list price, pay in 30 days and don’t back-charge.

About the Author
L. Douglas Mault is president of the Executive Advisory Institute, Yakima, Wash.