Does it matter if you wait longer to get paid by your customers? Only about a million dollars’ worth. In this example, the company on the left gets paid by its customers in 45 days on average, and the one on the right in 90 days. Nothing else changes. Assumptions for sales, costs, expenses, and everything else are exactly the same. In the first case, the minimum cash balance is just less than half a million dollars, and in the second case, the one on the right, the cash balance is actually a deficit of more than half a million dollars.

This of the implications. Both scenarios have the same sales of about $6 million per year, with the same profits of about 7% on sales. But the company on the left is doing just fine, and the company on the right is in real trouble, possibly going under.

Source: Business Plan Pro, AMT Sample Plan, Cash Pilot View. The cash pilot allows instant adjustment of critical cash variables including sales on credit as a percent of sales, collection days, inventory on hand, and payment days. This view shows the scenario on the left with 45 days collection says on average, and the one on the right with 90 days on average.
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Tim BerryTim Berry
Tim Berry

Tim Berry is the founder and chairman of Palo Alto Software and Bplans.com. Follow him on Twitter @Timberry.