Question

Suppose firm XYZ has AR (Accounts Receivable) = 500, Sales = 3000, Inventory = 300, Cost of Goods Sold = 1200, and AP (Accounts Payable) = 100. How much cash does firm XYZ save if it reduces its Days Sales Outstanding by 10 days? What are specific activities an organization can engage in to accomplish these goals?

Answer 1

Ans	Current Receivable turnover ratio = Net credit sales / average receivable
		3000 / 500 = 6 times
	Current days outstanding of receivables =   No. of days in year / Receivables turnover
			365/6
			60.83333 days
	If X Y Z reduces its day sales outstanding by 10 days then days outstanding receivable would be = 60.83333 - 10 = 50.83333 days
	Then new receivable turnover ratio would be 365 / 50.83333 = 7.20
	And new AR would be =   Receivable turnover ratio = Net credit sales / average receivable
	7.20 = 3000 / average receivable
	average receivable = 3000 / 7.20 = 416.6667
1	Cash saved = Current AR - New AR
	= 500 - 416.667
	$83.33
2	To achieve this target the company should follow below practices :
	Company should give the cash discount to it's customers
	Company should offer multiple payment methods to customer like cash, checks , E F Ts or credit/debit cards.
	Company should impose interest as penalty on overdue payments.