Hi,
I am new to this forum. I have a question. I just started to work in a small software firm and I realized a situation which I have not seen in my previous jobs. The revenue of the firm increasing much faster than the cash collections. The amount of cash collected is very good and the firm has lots of free cash flow. So this situation does not create any liquidity problems but receivables of the firm increasing constantly. In addition almost all the amounts in the receivables can be collected without problems.
The reason for this situation is that the sales department sells the software to municipalities which are a form of government and they always pay their debts. But when a particular customer has $100 then they persuade them to buy $150 worth of software. They pay only $100 this year. Next year they add $150 to the budget but then the sales team sells them $250 worth of software but they pay $150. So the cash increased from $100 to $150, sales increased from $150 to $250 and total receivables increased from $50 to $150. If the firm stops selling new software to the customer they will for sure pay their $150 debt but the sales team keeps selling them more than they can afford it is what drives not only the sales but also the cash collections up so the firm cannot stop selling them new software.
So how should we deal with this increasing receivables problem?
Thanks,
I am new to this forum. I have a question. I just started to work in a small software firm and I realized a situation which I have not seen in my previous jobs. The revenue of the firm increasing much faster than the cash collections. The amount of cash collected is very good and the firm has lots of free cash flow. So this situation does not create any liquidity problems but receivables of the firm increasing constantly. In addition almost all the amounts in the receivables can be collected without problems.
The reason for this situation is that the sales department sells the software to municipalities which are a form of government and they always pay their debts. But when a particular customer has $100 then they persuade them to buy $150 worth of software. They pay only $100 this year. Next year they add $150 to the budget but then the sales team sells them $250 worth of software but they pay $150. So the cash increased from $100 to $150, sales increased from $150 to $250 and total receivables increased from $50 to $150. If the firm stops selling new software to the customer they will for sure pay their $150 debt but the sales team keeps selling them more than they can afford it is what drives not only the sales but also the cash collections up so the firm cannot stop selling them new software.
So how should we deal with this increasing receivables problem?
Thanks,
