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Ocala Clinic’s services result in $5,000 in daily billings to third-party payers. On average, it takes the clinic 50 days to collect its receivables. If the interest rate on loans needed to finance receivables (cost of carrying receivables) is 10 percent, what is the clinic’s dollar annual cost of financing its receivables balance?

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Answer: $25,000

Explanation:

Carrying cost of receivables = 10% interest on loan to finance receivables

Daily billing to third party payers = $5000

Average Period to collect receivables = 50 days

Interest payment = 10% × $5000

Interest payment = 0.1 × $5,000

Interest payment = $500

Dollar annual cost of financing receivable balance:

Daily interest payment × average period to collect receivables

$500 × 50 = $25,000

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