Benchmarking Pay

Benchmarking

Air Products and Chemicals

Lawrence Sports has had a difficult time of keeping cash flow where they want and need it, in order to secure a better interest rate. Cash flow from customers, accounts receivable play an enormous role in this equation and while times may be tight sometimes for customers and sales people will always request extra terms for a struggling customer, setting a minimum payment term schedule is essential to maintaining the financial health of your own company.

Benchmarking Air Products and Chemicals showed the importance of just a few days improvement of is accounts receivable average, tightening of its credit terms and working its accounts receivable down by eight days.

In the final quarter of 2004 the average days to payment was around 69 days. This was from the invoice date to the actual receipt of cash into their accounts. This was fairly consistent with other industrial gas supplier’s, Air Products felt they could do better in order to impact their bottom line even more. To improve this they started to employ direct debit of invoices, put a tighter noose of extending credit and sticking with standard terms or encouraging companies to take advantage of small discounts for early payment.

Moving forward to the second quarter of 2007, the company had reduced the “average days to payment” for the 69 to 61 days. While this in itself does not sound like it would impact the bottom line here are a few numbers to consider. For every single day of improvement the company increased their cash flow by $25 MILLION dollars, therefore freeing up an astounding $200 plus million dollars of working capital, just by having people concentrate on accounts receivable. Looking deeper into the over all benefit of the company this change yielded an improvement in the OROI of between .25-.50% or approximately 2-4% improved profit.

These numbers were also achieved as the credit was getting tightened in the US economy and had no adverse effect on the growth of the company in fact over the same time frame the company grew by 35 plus percent so one can draw the conclusion that the two can be separate, shorten the accounts receivable while increasing sales, Lawrence should attempt to look at a similar aggressive approach.

AstroCosmos Metallurgical

The second area that normally is over looked as a key area to help companies manage their cash flow is in the payables area with vendors.

Lawrence has one vendor that is having a severe issue with their cash flow but in the scenario it was not discussed about the other suppliers as much. In many cases it is advised to work with a solid supplier from both a financial and quality stand point, while attempting to avoid a weak supplier. While the issue with Gerson Warehouse was an issue that happens from time to time that has to be over come this is part of doing business,