![]() |
|
![]() |
|
![]() |
|
![]() |
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.
Let's put to rest the fallacy that success, in sales... Read More
1. Outsource what takes you too long to doWhen you... Read More
It has been said you can lift the Rock... Read More
Almost daily, newspapers, business magazines, radio and television carry reports... Read More
If you have a business on the Internet you should... Read More
In my career, I have had a total of 3... Read More
We all are project managers. Some of us manage projects... Read More
Please don't think I am calling you a "moron" to... Read More
As the holiday season starts to settle in, the workload... Read More
At Macquarie University in the early '90s, three Australian early... Read More
Not having a business card is as bad as using... Read More
Rut -- a routine procedure, situation, or way... Read More
Are you ready for a BASH? Have you ever been... Read More
A lot of people are at a loss when it... Read More
Do you know exactly what actions you need to do... Read More
From an employee's perspective, management often conducts itself in ways... Read More
In building and runnng an independent private practice or small... Read More
1. Focus on the other Being known as a... Read More
1. Locks and Padlocks ? Locks on all outside entrances... Read More
One way to manage your time more effectively is to... Read More
Your business card is a valuable piece of real estate... Read More
I believe some people create and publish websites for the... Read More
If you've been thinking of starting a business on the... Read More
Here are seven excellent ways to earn income from international... Read More
Sometime soon you will be attending some training. It may... Read More
We've heard numerous success stories of Internet entrepreneurs like Jeff... Read More
Many businesses lose money yearly because they don't think creatively... Read More
Studies have proven that there is one reason why people... Read More
Never in history have more entrepreneurs launched more new businesses!... Read More
The lack of strong boundaries is one of the chief... Read More
Always include a powerful signature on every email you send... Read More
Millions of people start new small businesses in the United... Read More
Counselling non-performing team members is a tough part of any... Read More
In Jack Canfield and Mark Victor Hansen's original "Chicken Soup... Read More
Here are a few ideas to get you started, all... Read More
Part Two of Cash to Cash Cycle SeriesNext: SalesWe've already... Read More
1. Maintain regular working hours and stick to them.2. Get... Read More
In my career, I have had a total of 3... Read More
One way links will help you gain better rankings in... Read More
A lot of people are at a loss when it... Read More
Ten Tips for Staying ConnectedMany of my business clients tell... Read More
At Macquarie University in the early '90s, three Australian early... Read More
As a counselor, therapist or healing professional (massage therapist, physiotherapist,... Read More
What is a niche business? A niche business is one... Read More
Either simply a looker-on or a player in the world... Read More
If you're a beginner, starting a website doesn't have to... Read More
Most people have at least one favorite quotation from a... Read More
From an employee's perspective, management often conducts itself in ways... Read More
The 2004 election is over--at least in the minds of... Read More
1. Use subheads throughout your ad copy.Subheads are great to... Read More
Top Quick TipsTop Quick Tips |