You can “find” $250,000 by improving inventory management; now, let’s find another $250,000 with accounts receivable procedures.
“What could your business do with an extra $1,000,000?” Inventory is the first of four areas that will lead toward our million-dollar goal. You can 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.
Let’s continue that crucial theme of time with another major source on your balance sheet; specifically, accounts receivable, or “A/R”. If you have $500,000 or more in accounts receivable…STOP right there! We have found it again.
Why? Because if we focus on reducing your average days collection by 50%, your accounts receivable balance will fall to $250,000. The result? An extra $250,000 in your bank account! Just like that, we’re halfway to our $1,000,000 goal!
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. Next, we designed and implemented a process to improve A/R performance.
The metrics we developed reduced their “over 60” accounts receivable 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! Again, it’s obvious what a crucial role time plays and how an increase in velocity and discipline directly lead to increases in efficiency and cash savings. So, how can you use time to your advantage?
Examine customer accounts that go beyond your terms. Do not wait until twice the net terms to take action.
Examine credit process for slippage. Do you have a credit approval process? Do you perform credit checks? What standards are used to extend credit?
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.
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).
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.
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 $35,000. But then the supervisor uses nothing more than On-The-Job (OJT) training for the clerk.
Does your CFO think 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 of $6,000,000 per year? After all, it only takes a 7% 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?
With the A/R department you should use each element of the accounts receivable procedures to gain the most benefit for your business. And with time-saving procedures set in place, you will let your efficiency work for you
With accounts receivable procedures in place, you will increase your efficiency by reducing your Average Days Collection. And of course a reduction in Average Days Collection means your A/R balance will also fall, creating more cash on hand. And already we’re halfway to our $1,000,000 goal!