Financial Guide for SMEs - SME Corporation Malaysia

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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
Financial Guide for SMEsCash Conversion Rate CalculationThe cash conversion rate is calculated as:DaysInventoryPlus Days Debtors Less Days CreditorsDaysInventory36.5PlusAdam’s Computer BagsCash Conversion RateDays Debtors126LessDays Creditors48.2EqualsCashConversionRate114.3This calculation shows that for Adam’sComputer Bags the working capitalcycle takes 114.3 days from the startof the transaction to when thetransaction is completed and convertedback to cash.TIPCalculate your cash conversion rate regularly and implementimprovement to your working capital to release idle cash that is notbeing used within the business. This will reduce the need to borrowadditional funds to support the operations of the business, decreasedependency on funds from fi nanciers, and reduce any interestexpense incurred65Chapter 2-5 p22-65 Eng.indd 658/15/11 5:02:00 PM
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FinancialGuide for SMEs
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Financial Guide for SMEsAbout the G
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Financial Guide for SMEsChapter6 :
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Financial Guide for SMEsIntroductio
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Financial Guide for SMEsCreditorsCu
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Section I : Business Finance Basics
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Financial Guide for SMEsUnderstandi
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Section IV : Managing LendersBanker
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Financial Guide for SMEsSME FINANCI
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Financial Guide for SMEs2.3.4.5.Sec
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Financial Guide for SMEs3.4.Section
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Financial Guide for SMEsType of Doc
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Financial Guide for SMEs3.4.5.6.7.8
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Financial Guide for SMEsLoan Applic
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Financial Guide for SMEs141chapter
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Financial Guide for SMEsRefinancing
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Financial Guide for SMEsBenefits of
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Financial Guide for SMEsChange in v
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Financial Guide for SMEsYou should
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Section V : Better Business Financi
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Financial Guide for SMEsFinancial C
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Financial Guide for SMEsProcedureAc
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Financial Guide for SMEsBank Reconc
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Financial Guide for SMEsEmployeesAr
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ChapterSix-Cash and ProfitCashYouro
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Financial Guide for SMEsACKNOWLEDGE
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