Part Two of Cash to Cash Cycle Series
Next: Sales
We've already found $250,000?so let's find another $250,000?
Laying the Foundation
Last week, 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 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?
Maximizing 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 on hand. And just like that we're halfway to our $1,000,000 goal. All you have to do is grab it.
Next week, 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.
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, Inc.
It has been said you can lift the Rock... Read More
What would You do with $1,000,000With $1 Million would you:?... Read More
The lack of strong boundaries is one of the chief... Read More
Having business partner or planning to start a business with... Read More
Most people wish they read more. It is an activity... Read More
Let's put to rest the fallacy that success, in sales... Read More
Be aware that 40 million crooks obtained credit card numbers... Read More
Which one are you? An effective IT project manager, able... Read More
1. Admit there is a problem.The very first step in... Read More
Email etiquette is the key to help calm down anxious... Read More
So you have set up your company, fairly established and... Read More
If you are thinking of starting a new business, or... Read More
Leadership, leadership development and leadership training are "Hot" issues in... Read More
If you are like me, you are living some distance... Read More
1. Use subheads throughout your ad copy.Subheads are great to... Read More
Ten Tips for Staying ConnectedMany of my business clients tell... Read More
Being appropriately dressed is essential in making good impressions in... Read More
"Vision is the spectacular that inspires us to carry out... Read More
1. Combine Emotion and LogicConsumers buy because the want to... Read More
If you have a business on the Internet you should... Read More
10. Procrastination Condemnation - Lose the Labels! All those things... Read More
Are you ready for a BASH? Have you ever been... Read More
I'm sure you've seen it happen every year: your business... Read More
Web Site Blues? Need one, don't know where to start?... Read More
Never in history have more entrepreneurs launched more new businesses!... Read More
induction street lighting dimmable led light bulb Pete's produce ..Sometime soon you will be attending some training. It may... Read More
As a counselor, therapist or healing professional (massage therapist, physiotherapist,... Read More
My husband and I were enjoying our dinner meal one... Read More
One way links will help you gain better rankings in... Read More
Use the checklist below to make sure your article, tip,... Read More
Here are a few ideas to get you started, all... Read More
Many mistakes can be made in business and if you... Read More
What follows is a bold statement, but sometimes it takes... Read More
Although dentistry may appear to be different than other types... Read More
Are the endless lists of Top-7's and Top-10's taxing your... Read More
It has been said you can lift the Rock... Read More
1. Make a clear, specific commitment to what you want.... Read More
Imagine if you were going to address a stadium full... Read More
Networking is probably the best way to build a profitable... Read More
Are you not sure what Business to buy? Need to... Read More
Skilled workers of every age have prized their tools. I... Read More
Gas prices continue to go through the roof and increased... Read More
Clarity is an absolutely essential ingredient for you to achieve... Read More
A lot of people are insecure about buying something or... Read More
Good Speakers need good listening skills to become Great CommunicatorsSpeakers... Read More
1. Use subheads throughout your ad copy.Subheads are great to... Read More
1. Admit there is a problem.The very first step in... Read More
Viral Marketing is allowing people to giveaway and use your... Read More
This is a quick checklist of a few things that... Read More
Every event you hold can be extremely successful. Apply these... Read More
Top Quick TipsTop Quick Tips |