Lamar Lumber Company has sales of $10 million per year, all on credit terms calling for payment within 30 days; and its accounts receivable are $2 million. What is Lamar’s DSO, what would it be if all customers paid on time, and how much capital would be released if Lamar could take action that led to on-time payments?
We have provided with the information that,
Lamar Lumber Company has sales of $10 million per year
credit terms calling for payment within 30 days;
Its accounts receivable are $2 million
Now letus find out Lamar’s DSO
Sales = $10,000,000; A/R = $2,000,000; DSO = ?
DSO =Recivable/Sales/365
=$ 2,000,000 / $ 10,000,000/365
=73 days.
If all customers paid on time (assuming that it makes no sense for customers to pay earlier than 30 days), then the firm’s DSO = 30 days. If customers paid on time, the firm’s A/R = 30 ´ $10,000,000/365 = $821,917.81.
Cash freed up = $2,000,000 – $821,917.81 = $1,178,082.19.
