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Strategies for Writing Receivables Procedures
by: Chris Anderson
The Cash to Cash Cycle: Part Two of Series
Part One: Inventory
Part Two: Accounts Receivable
Part Three: Sales and Marketing
Part Four: Accounts Payable
Part Five: Effective Policies and Procedures: The Complete Cash to Cash Cycle
We’ve already found $250,000…so let’s find another $250,000…
Laying the Foundation
Last article in this series, we raised the question: what would your business do with $1,000,000? To lay the
foundation we introduced inventory as the first of four areas that will lead toward our Million dollar goal. And
you saw exactly how to achieve the first $250,000 in cash savings by avoiding delays with an increase in
velocity, as well as an increase in discipline and competency. But how exactly? With time – as you saw with
inventory and as you’ll see this week.
Tackling Accounting Procedures
Let’s continue that crucial theme of time with another major source on your balance sheet – specifically,
accounts receivable (A/R). If you have $500,000 or more in accounts receivable then STOP! We have found it
again.
Reducing Average Days Collection
Why? Because if we focus on reducing your average days collection by 50%, then your accounts receivable
balance will fall to $250,000 and the result will be an extra $250,000 in your bank account. And just like that,
we’re halfway to our $1,000,000 goal.
So now, let’s see how this actually works in a real-life business scenario.
Accounting Procedures Service Business Example
A service organization with $700,000 in average A/R balances needed assistance. So we examined their A/R
function to understand and quantify the workflow and workload issues. Then we designed and implemented a
process to improve the A/R performance.
The metrics we developed reduced their “over 60‿ accounts receivables by 85% and their overall A/R balance
by 50% within 90 days of implementing the new procedures. With these new processes and reports, the
company now tracks Average Days Collection and past due rather than just Days Sales Outstanding (DSO) as
the measure of their collection effectiveness.
The result: an extra $350,000 in cash. And, again, we explicitly see the crucial role of time and how an
increase in velocity and discipline directly yields an increase in efficiency and cash savings. So how can you
use time to your advantage?
Methods to Design the New Accounting Process
Grabbing Your Policy Goal
With well-defined processes and procedures in place, you will increase efficiency by reducing your Average
Days Collection. And of course a reduction in Average Days Collection means your Accounts Receivable
balance will also fall, creating more cash in cash on hand. And just like that we’re halfway to our $1,000,000
goal. All you have to do is grab it.
Next part of the series, we will look at finding still another $250,000 in the Sales function – which will give us
$750,000 toward our goal of $1,000,000 in cash savings. So, again, not only do you aim to reap the rewards of
extra savings to your bottom line, but also see more cash in the bank.
About the author:
Chris Anderson is currently the managing director of Bizmanualz, Inc. and co-author of policies and
procedures manuals, producing the layout, process design and implementation to increase performance.
To learn how to increase your business performance, visit: Bizmanualz Policies, Procedures & Forms
Next Article
by: Chris Anderson
The Cash to Cash Cycle: Part Two of Series
Part One: Inventory
Part Two: Accounts Receivable
Part Three: Sales and Marketing
Part Four: Accounts Payable
Part Five: Effective Policies and Procedures: The Complete Cash to Cash Cycle
We’ve already found $250,000…so let’s find another $250,000…
Laying the Foundation
Last article in this series, we raised the question: what would your business do with $1,000,000? To lay the
foundation we introduced inventory as the first of four areas that will lead toward our Million dollar goal. And
you saw exactly how to achieve the first $250,000 in cash savings by avoiding delays with an increase in
velocity, as well as an increase in discipline and competency. But how exactly? With time – as you saw with
inventory and as you’ll see this week.
Tackling Accounting Procedures
Let’s continue that crucial theme of time with another major source on your balance sheet – specifically,
accounts receivable (A/R). If you have $500,000 or more in accounts receivable then STOP! We have found it
again.
Reducing Average Days Collection
Why? Because if we focus on reducing your average days collection by 50%, then your accounts receivable
balance will fall to $250,000 and the result will be an extra $250,000 in your bank account. And just like that,
we’re halfway to our $1,000,000 goal.
So now, let’s see how this actually works in a real-life business scenario.
Accounting Procedures Service Business Example
A service organization with $700,000 in average A/R balances needed assistance. So we examined their A/R
function to understand and quantify the workflow and workload issues. Then we designed and implemented a
process to improve the A/R performance.
The metrics we developed reduced their “over 60‿ accounts receivables by 85% and their overall A/R balance
by 50% within 90 days of implementing the new procedures. With these new processes and reports, the
company now tracks Average Days Collection and past due rather than just Days Sales Outstanding (DSO) as
the measure of their collection effectiveness.
The result: an extra $350,000 in cash. And, again, we explicitly see the crucial role of time and how an
increase in velocity and discipline directly yields an increase in efficiency and cash savings. So how can you
use time to your advantage?
Methods to Design the New Accounting Process
- Decrease collection cycle. Examine customer accounts that go beyond your terms. Do not wait until
twice the net terms to take action.
- Tighten credit policy. Examine credit process for slippage. Do you have a credit approval process? Do
you perform credit checks? What standards are used to extend credit?
- Reduce credit terms. Change the credit terms you offer your customers. If you offer terms of net 45,
reduce it to net 30. You might offer a discount of 1% if paid within 10 days else net due in 30 days. This
is equivalent to 18 % annual interest and most businesses will take those terms.
- Shorten the invoice process. Bill your customers immediately. This is a big one. Many service
organizations wait until the end of the month to tally billable hours and determine customer charges.
Do not wait until the end of the month. This could reduce your day’s receivable by as much as 15 days
right there. Email or fax your invoices to save another day or two (e.g. QuickBooks accounting software
contains this feature).
- Reduce billing errors. Most customers delay payments because of invoice errors. Customers won’t
recognize the invoice until it is corrected and may not even notify you, the vendor, of the error until you
call for collection. Again, avoiding this delay in error and time will amount to cash savings.
- Train Accounts Receivables personnel. Make sure that all personnel involved are training to
understand the performance metrics for their jobs. For example, a company will manage $500,000 in
monthly A/R balances (that’s $6,000,000 per year!) using an A/R clerk who makes $30,000. But then
the supervisor uses nothing more than On-The-Job (OJT) training for the clerk. Then the CFO thinks
that he or she (the CFO) is really managing the money. But, in reality, that’s not the case; the clerk is
managing the money day-to-day. So shouldn’t the A/R clerk receive enough training to manage such a
significant amount? After all, it only takes a 6% change in A/R in one month to equal the A/R clerk’s
entire annual salary. Isn’t the A/R savings worth a little extra time in training?
- Maximize the Accounting Process. With the Accounts Receivable department you should use each
element of the process to gain the most benefit for your business. And with time-saving procedures set
in place, you will let your efficiency work for you.
Grabbing Your Policy Goal
With well-defined processes and procedures in place, you will increase efficiency by reducing your Average
Days Collection. And of course a reduction in Average Days Collection means your Accounts Receivable
balance will also fall, creating more cash in cash on hand. And just like that we’re halfway to our $1,000,000
goal. All you have to do is grab it.
Next part of the series, we will look at finding still another $250,000 in the Sales function – which will give us
$750,000 toward our goal of $1,000,000 in cash savings. So, again, not only do you aim to reap the rewards of
extra savings to your bottom line, but also see more cash in the bank.
About the author:
Chris Anderson is currently the managing director of Bizmanualz, Inc. and co-author of policies and
procedures manuals, producing the layout, process design and implementation to increase performance.
To learn how to increase your business performance, visit: Bizmanualz Policies, Procedures & Forms
Next Article
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