Answer to Question #154714 in Financial Math for Jayden Yoon

Question

[Situation]

Imagine you run a company that sells a medical device to small

healthcare facilities such as urgent care clinics.

You have to pay for the Bill of Materials that go into manufacturing/assembling your medical device

upfront but your customer pays you on net 30, net 45, or net 60 terms after delivery (depending on their contract with you) when they get paid by health insurers or the government, and it generally takes a month from purchasing materials to finished product ready to ship.

Many customers pay late. You sell about $1.8M of these devices a month, and sales have been

growing at 30% month-over-month. You have $3.6M of total outstanding

Accounts Receivable as of the end of Nov 2020 and $6.4M in the bank running

at breakeven (on an accrual basis).

Q1. How long until you're out of cash even though the business itself isn't losing money?

Q2. What OKR(s) would you set for the account management and finance team(s) for the next month / quarter to avoid this outcome while preserving growth?

Answer 1

Q1. Depending on the invoice issued by the equipment suppliers, if $2M, then the cash may run out in a month as the buyers pay a certain percentage of the advance, not in full.

Q2. This situation is unacceptable, since late payment from buyers and a significant amount of accounts receivable is unpaid. This case, there may be cash gaps between cash movements, so it is necessary to review the terms of payment to suppliers and receipt of money from buyers (approximately so that they are in one period) and the advance must be made 100 for buyers. With unpaid accounts receivable, it is necessary to carefully understand.