Boosting Cash Flow for College and Retirement
Despite a healthy income and substantial retirement savings, the Johnsons felt squeezed. Their consulting business was generating $150,000 annually, but slow payments were impacting cash flow. They were often waiting 60-90 days to receive payment from clients, hindering their ability to invest further in their business and meet immediate family needs. They needed a way to quantify and address this issue to improve their overall financial picture.
Using the Receivables Turnover Ratio Calculator, we determined the Johnsons' current ratio was 2.0, indicating slow collection practices. By implementing strategies to shorten payment terms and offer early payment discounts, we projected an increase to a ratio of 3.5 within a year. This improvement will free up approximately $65,000 in working capital annually, which can be redirected toward their children's college funds and boosting their retirement contributions.
The Receivables Turnover Ratio was calculated by dividing the annual credit sales ($150,000) by the average accounts receivable balance. Improved collections will directly reduce the average accounts receivable and increase the ratio.
$65,000 in freed-up capital annually
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