Presentation Title

Startup Cash Flow Management: Accounts Receivable Liquidation

Faculty Mentor

Mark Collinson, Lewis Long

Start Date

17-11-2018 8:45 AM

End Date

17-11-2018 9:00 AM

Location

C153

Session

Oral 1

Type of Presentation

Oral Talk

Subject Area

behavioral_social_sciences

Abstract

Accounts receivable are accrued by selling goods or services on credit and typically occupy a significant portion of a company’s assets. When these receivables accumulate, they can be lethal towards corporal health, and startup companies – business entities characterized by growing sales and therefore growing receivables – are the most susceptible towards experiencing such a buildup. The dangers of holding too many receivables are severe: they can put a company at risk of claiming bankruptcy by jeopardizing the opportunity to realize their full potential, by limiting their ability to make important financial decisions, and by incurring too many expenses. This problem has also introduced factoring, or the selling of accounts receivable widely used as a combative source, but its usage remains questionable as it may ruin the likelihood of future transactions with a client. Strategically structured credit and effective business models can be used to maintain the liquidity of a business’s assets. Financial ratios such as the receivables turnover ratio and the operating cash cycle should be interpreted in order to influence business decisions that promote the liquidation of these invoices. Firsthand interviews with business executives, accountants, and consultants provide evidence and illustration of the various ways that startups deal with the receivables.

Summary of research results to be presented

Some companies, especially those involved in the service industry, will manage their liquidity through activities that are less structuralized than practices such as factoring and the creation of credit policies: they will emphasize on building amicable relationships with their clients so that even if the firm sells to the client on credit, they can expect to be paid on time.

A buildup of accounts receivable can dramatically reduce a company’s gross margin. Businesses often take loans to secure working capital that was originally tied up by the receivables to fulfill expenses and investments. However, although receivables do not garner interest yet loans do, the gross margin is reduced by the paid interest. These companies may then turn to hiring accountants to help expedite the collection process. Regardless of whether this method is effective or not, the rise in payroll costs the company even more of their working capital, further diminishing their gross margin.

By reducing its Operating Cash Cycle, or the length of time a company’s cash is tied up in working capital before the funds are returned by customers, a business can benefit from a boost in its self-sustainable growth rate. If, for example, the business managed to reduce its collection time by 5.7%, its Operating Cash Cycle would decrease by 6.67%, allowing the company to afford growth of more than 1.5% - all derived internally.

This document is currently not available here.

Share

COinS
 
Nov 17th, 8:45 AM Nov 17th, 9:00 AM

Startup Cash Flow Management: Accounts Receivable Liquidation

C153

Accounts receivable are accrued by selling goods or services on credit and typically occupy a significant portion of a company’s assets. When these receivables accumulate, they can be lethal towards corporal health, and startup companies – business entities characterized by growing sales and therefore growing receivables – are the most susceptible towards experiencing such a buildup. The dangers of holding too many receivables are severe: they can put a company at risk of claiming bankruptcy by jeopardizing the opportunity to realize their full potential, by limiting their ability to make important financial decisions, and by incurring too many expenses. This problem has also introduced factoring, or the selling of accounts receivable widely used as a combative source, but its usage remains questionable as it may ruin the likelihood of future transactions with a client. Strategically structured credit and effective business models can be used to maintain the liquidity of a business’s assets. Financial ratios such as the receivables turnover ratio and the operating cash cycle should be interpreted in order to influence business decisions that promote the liquidation of these invoices. Firsthand interviews with business executives, accountants, and consultants provide evidence and illustration of the various ways that startups deal with the receivables.