How to Measure the Cost Benefits of Automating Your AR Process

Eugene Vyborov

Purchasing a technology solution can represent a huge up-front investment for a corporation—but one that can potentially pay for itself many times over. But make the wrong choice and that investment can turn into a financial sinkhole.

That’s why Return on Investment (ROI) takes on such preemptive importance for CFOs in the market for a technology solution. In a YayPay survey of middle-market CFOs and finance leaders, ROI was the single biggest consideration in choosing a workflow automation platform.

Quantify ROI for an accounts receivable (AR) automation platform

Consider the following:

  1. Clarify your expectations. What specific benefits are you looking for? The YayPay AR automation platform, for example, offers two primary benefits: faster collections and lower collection-related expenses.
  2. Quantify the projected improvement in DSO. The speed of collections is represented by Days Sales Outstanding—the time it takes to convert invoices into cash. The lower the DSO, the faster you can unlock cash flows.
  3. Do the math. The following example, from the American Bureau of Collections, illustrates how a middle-market growth business can unlock cash flows by lowering its DSO.

How to determine the increase in cash flows by lowering DSO

Step 1 - Calculate the current cost of carrying receivables

The company, Wayne Jr Enterprises, has annual credit sales of $30 million. Its payment terms are net 45 days, but its average DSO is 60. The company pays 3.75% on its borrowings. Here’s how to calculate its current cost of carrying receivables:

  1. Total receivables ($30 million) X the interest rate (3.75%) ÷ 365 X 60 = DSO ($184,932). This means that it costs Wayne Jr Enterprises $184,932 every 60 days to provide its customers with $30 million in annual credit. What if Wayne could cut its DSO to 45 days?
  2. Current DSO (60 days) — best possible DSO (45 days) = reduction in DSO (15 days)
  3. Annual credit sales ($30 million) ÷ 365 = daily credit sales ($82,192)
  4. Daily credit sales ($82,192) X excess DSO (15) = cash flow trapped in excess uncollected receivables ($1,232,877)
  5. Cash flow trapped in excess uncollected receivables: ($1,232,877) X interest rate (3.75%) = annual interest ($46,233)
  6. Total cash flow trapped in excess uncollected receivables: $1,279,110

Step 2 - Calculate increase to cash flow from lowering DSO

Because its 60-day DSO is 15 days longer than its best possible DSO, Wayne Jr Enterprises has essentially locked up over $1.2 million in receivables. The question, then: How much cash flow could Wayne Jr free up by automating the collections process and reducing its DSO by just three days?

  1. Excess days in uncollected receivables: 12 (current DSO – 3 – best possible DSO)
  2. Daily credit sales: $82,192 (annual credit sales ÷ 365)
  3. Cash flow trapped in excess uncollected receivables: $986,304 (12 X $82,192)
  4. Interest rate: 3.75%
  5. Annual interest: $36,986
  6. Total cash flow trapped in excess uncollected receivables: $1,023,290

Reducing DSO by just three days unlocks $255,820 in cash flows ($1,279,110 - $1,023,290) and saves the company nearly $37,000 a year in interest payments.

Step 3 - Additional savings from cutting collection costs

At Wayne Jr Enterprises, collections are managed by two employees who spend time each day manually writing reminder emails. Their combined salary: $120,000. Platforms that automate most manual tasks reduce collection-related time and effort by at least 30%, on average.

Since payroll is typically a company’s biggest collection-related expense, YayPay could yield savings of $36,000—a number that is likely to rise significantly, since Wayne Jr anticipates adding $4 million in credit sales year over year.

Step 4 - Make the ROI decision

The question before Wayne Jr’s CFO is this: Is the automation product license fee worth the annual cash flow improvement of $250,000, the $37,000 drop in interest costs, and payroll savings of $36,000?

Does the ROI justify the initial outlay?

It’s question that no CFO can afford not to ask—and to answer.

Eugene Vyborov
About the Author

Eugene is the CTO and co-founder of YayPay, specializing in building enterprise applications for the financial industry. He is responsible for YayPay’s product delivery, strategic technology vision, and core product architecture. Previously, Eugene has founded two technology businesses, A2A and WebiNerds, and was Lead Technical Associate at TechStars Boston in 2016. He has a master’s degree in Computer Science from Dnipro National University, Ukraine.

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