Part Two of Cash to Cash Cycle Series

Part One: Inventory

Next Week: Sales

We’ve already found $250,000…so let’s find another $250,000…

Laying Foundation

Last week, we raised question: what would your business do with $1,000,000? To lay foundation we introduced inventory as first of four areas that will lead toward our million dollar goal. And you saw exactly how to achieve 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 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 workflow and workload issues. Then we designed and implemented a process to improve 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 new procedures. With these new processes and reports, company now tracks Average Days Collection and past due rather than just Days Sales Outstanding (DSO) as measure of their collection effectiveness.

The result: an extra $350,000 in cash. And, again, we explicitly see 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 New Accounting Process

Decrease collection cycle. Examine customer accounts that go beyond your terms. Do not wait until twice net terms to take action.

It’s not hard to see why. For most companies, time is money, and they frequently find themselves scrambling to release a product. It can therefore be tempting to save time by cutting corners—by shortening or eliminating development stages that appear to slow down coding process.

Many programmers scoff at importance of this documentation. “I know what I’m doing!” they say. “Time is short, and writing about my work will only slow things down. Besides, if something goes wrong, I know that I can fix it.” This is a terribly naïve and short-sighted approach. Such a cavalier attitude toward documentation can be disastrous to a company’s future.

It doesn’t help that programmers and engineers are notorious for having lackluster communication skills. It doesn’t help that documentation is a task that they seldom enjoy. The result is often an intractable mess—utter software design chaos.