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Top 7 Strategies for Writing Accounting Procedures
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Part Two of Cash to Cash Cycle Series
Part One: http://www.bizmanualz.com/articles/01-05-05_inventory_procedures.html/?ART78
Next Week: 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
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?
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 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.
About the author:
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: http://www.bizmanualz.com?src=ART79
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