SYNERGY BETWEEN ACCOUNTS RECEIVABLE & ACCOUNTS PAYABLE 2
In order to avoid undue pressure on your cash (as the increase in Sales pushes up your Cost of Goods), you have to make sure that your accounts receivable & accounts payable are synchronized. You have to make sure that the number of days in which you collect your accounts receivable (i.e., credit sales) is always less than the number of days in which you have to pay your suppliers (i.e., cost of goods).
In a small business with not so many transactions, it is easy to track days receivable and days payable. If / when your credit program / accounts receivable results in a growth in Revenues, your Cost of Goods will also grow in step with your Revenues. The number of transactions will also grow and it may not be as easy to track days receivable and days payable.
A simple formula for determining days receivable is:
The formula for days payable is:
You get the amounts for your accounts receivable and account payable from your Balance Sheet; your Cost of Goods and Credit Sales from your Income Statement. “Days” is based on the period covered by your Financial Statements (i.e., for the quarter, the half-year, etc).
Your Days Receivable should always be less than your Days Payable.
If it is the other way around, you will need more Working Capital because your collections will not be adequate to meet all your bills.
graphics by Ren Garcia / images from Microsoft Clipart
Tags: cost of goods, credit sales, days payable outstanding, days receivable outstanding, synergy, working capitalRelated Stories
POSTED IN: Accounting Concepts, Accounting for NonAccountants, Accounts Payable, Accounts Receivable, Best Business Practices, Small Business Finance, Success Accounting
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