Paying for Faster Collections: Costs, Returns, and a Three-Year Net Present Value for the Receivables Plan
Student Name
Master of Business Administration Program, Aspen University
BUS 799: Graduate Capstone
Instructor Name
Month Day, Year
Paying for Faster Collections: Costs, Returns, and a Three-Year Net Present Value for the Receivables Plan
A capstone recommendation is more persuasive when its financial effects are shown in full. This section estimates the costs and benefits of the five recommendations for Keystone Electric, the composite electrical subcontractor at the center of this project, calculates a three-year net present value, tests a low case, and distinguishes the plan's one-time balance sheet effect from its recurring income effect.
Costs
The plan requires three new costs. A construction billing module for the existing accounting system costs $18,000 a year, with $12,000 for setup. A half-time billing coordinator, who will pre-fill payment applications and manage document checklists, costs about $39,680 a year including 28 percent for benefits and payroll taxes. Training for project managers, billing staff, and field foremen is estimated at $6,000 in the first year. One-time costs therefore total $18,000, and ongoing costs are $57,680 a year.
Benefits
The main benefit is lower borrowing. Each day of receivables is worth about $104,100 at Keystone's revenue of $38.0 million. Recovering 21 days would reduce average receivables by about $2.19 million, and because Keystone funds the gap with a credit line at about 8 percent, the interest saved would be about $174,900 a year once the full reduction is reached. In the first year, as changes phase in, the average reduction is estimated at 12 days, saving about $99,900.
A second benefit comes from change orders. Over the last two years, Keystone wrote off an average of $140,000 a year in change work that was never approved in writing. The signed change order rule should cut these losses at least in half, saving about $70,000 a year at full effect and $35,000 in the first year. A third benefit, time saved by project managers, is real but not counted: the pilot suggested about two hours saved per application, roughly 1,150 hours a year, but that time will go to field work rather than reduce payroll.
Net Present Value
Table 1 shows net annual cash flows and their present value at Keystone's 8 percent cost of borrowing, which is the appropriate rate because the savings take the form of reduced borrowing (Brealey et al., 2020).
| Year 1 | Year 2 | Year 3 | |
|---|---|---|---|
| Interest saved | $99,900 | $174,900 | $174,900 |
| Change order write-offs avoided | $35,000 | $70,000 | $70,000 |
| Ongoing costs | ($57,680) | ($57,680) | ($57,680) |
| One-time costs | ($18,000) | ||
| Net cash flow | $59,265 | $187,224 | $187,224 |
Results and Low Case
Discounted at 8 percent, the three-year net present value is about $364,000. The plan pays back its first-year costs within that year. In a low case, in which Keystone recovers only 12 days at full effect, reaching 8 in the first year, and avoids only $35,000 of write-offs a year after a first-year $20,000, net cash flows are about $10,950 in year one and $77,265 in years two and three, for a net present value of about $137,700. Even if the plan delivers little more than half its target, it still returns more than it costs.
These estimates are consistent with the research reviewed earlier, in which fewer days of receivables were associated with higher profitability among large and small firms (Deloof, 2003; García-Teruel & Martínez-Solano, 2007), but they do not depend on it. They rest on Keystone's own interest rate and write-off history.
The Balance Sheet Effect
The recurring savings understate the plan's importance. Reducing receivables by $2.19 million releases that much cash once, which Keystone can use to pay down its credit line. That does more than save interest: it gives the company room to absorb a slow month without borrowing, improves the ratios its bank and surety review when setting credit limits and bonding capacity, and allows Keystone to bid larger projects. These effects are difficult to value precisely, so they are described rather than added to the net present value.
Compared With the Alternatives
The owners could address the cash shortage in other ways, and the plan should be compared with them. The first is simply borrowing more: increasing the credit line would cover payroll but would add interest cost rather than remove it, and it would leave the underlying delays in place. The second is factoring, selling receivables to a finance company for immediate cash at a discount. Factoring provides cash quickly, but its fees would exceed the interest on the credit line, general contractors may object to paying a third party, and it too leaves Keystone's own billing practices unchanged. The third is renegotiating payment terms and retainage with general contractors, which may be worthwhile over time but depends on bargaining power Keystone lacks with its largest customer. The recommended plan is the only option that reduces cost while fixing causes Keystone controls, and it can be combined with the others later if needed.
Funding the Plan
The plan's costs are small enough to fund from operations. The $18,000 of one-time costs can come from the current year's budget for office systems, and the coordinator's salary will be charged to overhead. Because first-year savings of about $134,900 exceed first-year costs of $75,680, the plan does not require new borrowing, which would defeat its purpose.
Risks to the Estimates
The largest risk is interest rates: if Keystone's borrowing rate falls to 6 percent, steady-state interest savings drop to about $131,000, although the plan remains strongly positive. A second risk is that the half-time coordinator must become full-time as the company grows, adding about $40,000 a year. A third is that general contractors slow their own payments during an economic downturn, offsetting some of the improvement. The monthly dashboard will show whether the plan is on track, and the estimates should be updated after six months with actual results.
Conclusion
The receivables plan costs $18,000 once and $57,680 a year. At full effect it saves about $174,900 a year in interest and $70,000 in avoided write-offs, for a three-year net present value of about $364,000, and remains positive at about $137,700 if it reaches only 12 days. It also releases $2.19 million in cash. The financial case supports the owners approving the full plan.
References
Brealey, R. A., Myers, S. C., & Allen, F. (2020). Principles of corporate finance (13th ed.). McGraw-Hill Education.
Deloof, M. (2003). Does working capital management affect profitability of Belgian firms? Journal of Business Finance & Accounting, 30(3-4), 573-588. https://doi.org/10.1111/1468-5957.00008
García-Teruel, P. J., & Martínez-Solano, P. (2007). Effects of working capital management on SME profitability. International Journal of Managerial Finance, 3(2), 164-177. https://doi.org/10.1108/17439130710738718
How this BUS 799 Module 7 example is structured
Aspen's catalog describes BUS 799 as an individualized, work-related capstone that benefits the organization. Aspen does not publish module deliverables, so check your classroom for the exact prompt. This example separates one-time and ongoing costs, calculates benefits from company data with a ramp-up, computes net present value with a justified rate, tests a low case and distinguishes balance sheet from income effects.
BUS 799 Module 7 questions, answered
What does BUS 799 Module 7 usually ask for?
Work late in a graduate business capstone often asks for the financial justification of your recommendations: costs, benefits and a measure such as net present value or return on investment. Aspen does not publish module deliverables, so your classroom's instructions govern.
What discount rate should a capstone use?
Use a rate tied to the organization's cost of money for that decision; when savings take the form of reduced borrowing, the borrowing rate is a reasonable choice.
How is freeing cash different from saving money?
Reducing receivables releases cash once, which can pay down debt; the recurring saving is the interest no longer paid on that debt each year.
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