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Accounting InformationTop 7 Strategies for Writing Accounting Procedures
by:
Chris Anderson
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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-be your business do with $1,000,000? To lay the foundation we introduced inventory as the 1st of four areas that wish lead toward our million dollar goal. And you saw exactly how to bring home the bacon the 1st $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 due (A/R). If you have $500,000 or more in accounts due 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 due balance wish fall to $250,000 and the result wish be an extra $250,000 in your bank account. And simply 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 required assistance. So we examined their A/R function to understand and quantify the progress
and employment issues. Then we designed and enforced
a process to improve the A/R performance.
The metrics we developed reduced their “over 60” accounts assets
by 85% and their overall A/R balance by 50% inside
90 days of implementing the new procedures. With these new processes and reports, the institution now tracks Average Days Collection and past due rather than simply Days Sales Outstanding (DSO) as the measure of their collection effectiveness.
The result: an extra $350,000 in cash. And, again, we expressly
see the crucial role of time and how an increase in speed 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 client accounts that go on the far side
your terms. Do not wait until doubly 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 strength
offer a discount of 1% if paid inside
10 days else net due in 30 days. This is equivalent to 18 % annual interest and most businesses wish take those terms.
Shorten the invoice process. Bill your customers immediately. This is a big one. Many an service organizations wait until the end of the month to tally billable hours and determine client charges. Do not wait until the end of the month. This could reduce your day’s due by as more as 15 days right there. Email or fax your invoices to save another day or two (e.g. QuickBooks accounting computer code contains this feature).
Reduce request
errors. Most customers delay payments because of invoice errors. Customers won’t recognize the invoice until it is corrected and may not even as apprize you, the vendor, of the error until you call for collection. Again, avoiding this delay in error and time wish figure to cash savings.
Train Accounts Assets
personnel. Do sure that all personnel involved are training to understand the performance metrics for their jobs. For example, a institution wish manage $500,000 in monthly A/R balances (that’s $6 Million a year!) victimisation an A/R clerk who does $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 actually 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 obtain 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 Due 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 wish let your efficiency activity for you.
Grabbing Your Policy Goal
With well-defined processes and procedures in place, you wish increase efficiency by reducing your Average Days Collection. And of course a reduction in Average Days Collection means your Accounts Due balance wish likewise fall, creating more cash in cash on hand. And simply like that we’re halfway to our $1,000,000 goal. All you have to do is grab it.
Next week, we wish look at finding still another $250,000 in the Sales function – which wish 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 likewise see more cash in the bank - $1,000,000 cash to be exact.
Just about the author:
Chris Anderson is presently
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 discover how to increase your business performance, visit: http://www.bizmanualz.com?src=../../ART79
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