Financial Guide for SMEs - SME Corporation Malaysia

Financial Guide for SMEsUsing Numbers to Manage Payments from ReceivablesDays Debtors RatioThis ratio indicates how well the cash from receivables is being collected. Referredto as accounts receivable in accounting terms, this is the total outstanding amountowed to you by your customers. If these receivables are not collected reasonablyin accordance with their terms, you should reconsider the collection policy. Ifreceivables are excessively slow in being converted to cash, the liquidity of yourbusiness will be severely affected.The days debtors ratio is calculated as follows:Accounts receivableDays debtors = x 365Sales revenueAdam’s Computer BagsDays debtors = RM18,000 x 365 = 126 daysRM52,000This calculation shows that, on average, Adam collects from his debtors every126 days.Working Capital Cycle – Cash Conversion RateThe overall number of days to convert your trade fromthe cash outflow at the beginning of the working capitalcycle to cash received at the end of the cycle can becalculated through the cash conversion rate.DebtorsSalesCASHWork-inprogressPurchaseInventorySupplierPaymentHINTCalculate the cashconversion rate andcompare this with thestandards within yourindustry. Identify whichareas of the cycle areproblematic andprepare an action planto improve the cashconversion rate64Chapter 2-5 p22-65 Eng.indd 648/15/11 5:02:00 PM