Where is the money?
The seventh profit driver, accounts receivable (AR), sounds a little dull but is actually one of the more important barometers of the general health of the organization. AR can be a very good indicator of how well the main processes of the organization are designed and how well they operate together. Because AR is a measure at the end of the total product or service cycle, it’s not always simple to pinpoint where the problems are actually occurring. Here are a number of process areas that can manifest in elongated receivables:
- Accuracy and cycle time of the order entry process.
- Decision process for granting customers credit.
- Timeliness and accuracy of the billing process.
- Effectiveness and consistency of the collections process.
- Credit/return policies and process.
- Timeliness of cash/check deposits.
The interesting thing about AR in many companies is that there are both customer and self-inflicted wounds in this area. Customer’s can choose to delay or withhold payments either as a way to manage their own cash or because of some dissatisfaction with the delivered service or product. Organizations also inflict damage on themselves however by not managing the various processes listed above in a deliberate and coordinated manner. This can be a little trickier than it sounds because of all the different departments and functions involved in the various steps of the process. There is also generally varying levels of customer power based on size and buying volumes which can make collections issues a source of conflict between internal finance and sales groups.
Usually the best approach is to assess the root causes throughout the order cycle and then to attack the internally controllable issues first (accuracy and timeliness of order entry and consistent and deliberate collection processes). The success of freeing up some cash in a relatively short time frame can embolden the organization to then move on to some of the more politically sensitive collection issues.