Question

# Potter Manufacturing currently has \$580,000 in accounts receivable and generated \$4,550,000 in sales during the year...

Potter Manufacturing currently has \$580,000 in accounts receivable and generated \$4,550,000 in sales during the year just ended. Potter's CFO is unhappy with the DSO and wants to improve collections next year. Sales are expected to grow by 14% next year and the CFO wants to lower the DSO to the industry average of 42 days. If successful, by how much would the company's AFN be reduced? ?

Accounts Receivable = \$580,000

Sales = \$45, 50,000

DSO (Daily Sales Outstanding) = Accounts Receivable/ Sales * number of days

Or, DSO (Daily Sales Outstanding) = \$580,000/ \$45, 50,000*360= 46days (approx)

Next Year Sales = \$45, 50,000* 1.14 = \$51, 87,000

Now if the DSO is lowered to 42 days then accounts receivable would be;

42= Accounts Receivable/ \$51, 87, 000 *360

Or, Accounts Receivable = 42* 51, 87, 000/ 360= \$605,150

Now with the Previous DSO, company’s receivable at current growth of sales would have been;

46= Accounts Receivable/ \$51, 87, 000 *360

Or, 46* 51, 87, 000/ 360 = Accounts Receivable

Or, Accounts Receivable = \$662, 783

Now with the reduced target of DSO to 42 days AFN will be reduced by (\$662783 - \$605150) \$57633.