Part Two of Cash-to-Cash Cycle Series
We’ve already found $250,000…so let’s find another $250,000…
Laying the Foundation
Last time 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 today...
Tackling and Writing 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.
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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 days 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 Million a 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, we will look at finding still another $250,000 in the
Sales function – which will give us $750,000 toward our goal of
1 Million 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 - $1,000,000 cash to be exact.
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