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.
executive chauffeured services Bradford .. Madison to Airport carThere are many places you can get books, and I... Read More
It has been said you can lift the Rock... Read More
There are lots of benefits for some businesses to import... Read More
There are so many simple, yet really sure-fire ways of... Read More
The 9-to-5 grind can make you feel like a just... Read More
Either simply a looker-on or a player in the world... Read More
When sending mail to clients and potential clients, make your... Read More
In my career, I have had a total of 3... Read More
Do your remember when you first ventured out in the... Read More
Networking is probably the best way to build a profitable... Read More
If you don't possess the time, money or inclination to... Read More
You need sales and you wanted them yesterday. Here are... Read More
Are you not sure what Business to buy? Need to... Read More
You're busy with your business today, aren't you?You're pushing your... Read More
The term "junk mail" is a well-known term. To... Read More
In building and runnng an independent private practice or small... Read More
How many of us have been in a position where... Read More
The Internet is a fast growing medium, trancending the personal... Read More
1. Maintain regular working hours and stick to them.2. Get... Read More
What is Choice Theory (CT)? CT is a theory of... Read More
How's your business going to keep growing with the holidays... Read More
I'm sure you've seen it happen every year: your business... Read More
If you're a business owner, you know that repeat business... Read More
1. Use subheads throughout your ad copy.Subheads are great to... Read More
Good Speakers need good listening skills to become Great CommunicatorsSpeakers... Read More
O'Hare Chicago prom limo ..Do you run a business that seems to run you?... Read More
In my career, I have had a total of 3... Read More
1. Maintain regular working hours and stick to them.2. Get... Read More
We've heard numerous success stories of Internet entrepreneurs like Jeff... Read More
Here are some simple tips to help you improve your... Read More
With today's technology and people's need for more information it... Read More
If you're a business owner, you know that repeat business... Read More
Attraction marketing is about making a customer for life not... Read More
Many mistakes can be made in business and if you... Read More
Ten Tips for Staying ConnectedMany of my business clients tell... Read More
Authors/publishers are great at getting their books written. Entrepreneurs know... Read More
'Tis the season to give. And finding the right gift... Read More
1. Make a clear, specific commitment to what you want.... Read More
Hey, as hard as this may be for you to... Read More
The Internet is a fast growing medium, trancending the personal... Read More
Do you want to be #1-10 on Google and other... Read More
How many of us have been in a position where... Read More
Many businesses lose money yearly because they don't think creatively... Read More
Cross cultural differences can and do impede upon communication and... Read More
How do you increase business profits? Answer the following questions... Read More
Talking is the least important half of any conversation. Listening... Read More
Always include a powerful signature on every email you send... Read More
From an employee's perspective, management often conducts itself in ways... Read More
If you have a business on the Internet you should... Read More
Sometime soon you will be attending some training. It may... Read More
Top Quick Tips |