Let’s take a calculation example involving a business with an annual turnover of ten million. With a payment term of thirty days, outstanding receivables amount to €0.82 million. With a payment term of sixty days, the figure rises to €1.64 million. Imagine if the payment term were ninety or even one hundred and twenty days… These are substantial sums that cannot be utilised immediately for stock, investments, salaries or growth. And if you do grow, the problem actually gets worse. Just try doing the same calculation with a turnover of 15 million.
Days Sales Outstanding
It is also important to keep a close eye on DSO (Days Sales Outstanding) – the average number of days until payment – just as much as on turnover, EBITDA and profit margin. A company with a turnover of 10 million and a DSO of ninety days is in a very different financial position to one with a DSO of forty-five days. Reducing the DSO by fifteen days can quickly free up around €820,000 in working capital.
Choice or fate?
There are sectors where payment terms of ninety or even one hundred and twenty days are commonplace. The question, then, is not how quickly you can get your customer to pay, but how you can prevent your business from having to wait unnecessarily for funds. Factoring offers a solution to this. You can use your invoice portfolio to gain access to liquidity more quickly, whilst allowing your customer to stick to their usual payment terms.