The circle of credit and A/R management is closed when companies continuously monitor and improve each of the key steps in the process. Goals need to be established. Actual results need to be measured and compared against these goals. Opportunities for improvement need to be identified and changes made. Finally, new goals are established and information gathered to monitor the revised processes.
Please keep in mind that this is both an internal and external process. The internal component is an analysis of the efficiency and effectiveness of various credit and A/R management business processes themselves as well as individual employees (or work groups). Efficiency is tied to the cost of a business process (or one of its components), while effectiveness is tied to whether the specified goals are being achieved. You could spend great quantities of cash making a business process work, but that would not be cost effective. Conversely you could reduce costs but not achieve the required goals. Somewhere between these two extremes is the best suited path and that path will depend on your industry and the way you have decided to run your business.
What then needs to be measured and why? The following list is certainly not all inclusive but is intended to help establish a framework to measure efficiency and effectiveness.
Payment Terms: Cash flow can be impacted if payment terms are too liberal. While more lenient payment terms may be a reflection of competitive realities, they may also be used as a quick fix to gain business.
Invoicing Delays: If there is a delay between the time an order is shipped or a service provided and the invoice date, this may be an opportunity for improvement. Users should track both the average delay (general improvement) as well as investigate billing delays for specific invoices that exceed a specified limit (specific improvement).
Procedural Errors: The failure to meet a customer's business process requirements (purchase order number, invoice formats, pricing, even number of invoice copies) will lead to payment delays. These procedural errors need to be segregated by type, tracked, and continuously improved.
Service Disputes: If a customer does not pay on time due to an identifiable dispute or problem (goods or services are not provided on time, poor quality, or any other reason that can be tracked), cash flow will be negatively impacted. These specific problems need to be resolved as quickly as possible (another measurement standard) and they need to be tracked over time to determine if general improvement is being achieved.
Average Days Late: Average days late (ADL) measures a customer's payment history as it relates to the payment terms offered for each invoice. If a customer's ADL is increasing or is higher than average, this should be a trigger to contact the customer, not about a specific invoice, but their payment history in general. ADL may also indicate that a specific A/R representative is not quite as effective as they could be (when compared against other A/R reps). Finally, payment history should be one of the factors sales people consider when discussing future pricing with customers.
In each of the examples above, progress will be made only if identified problems are addressed immediately. This isn't the only solution though. Statistical and historical information need to be collected and tracked. For example, when an invoice becomes overdue, A/R reps need to determine both the classification of the problem (maybe this time it is a procedural error) as well as its specific subcategory (failure to indicate customer purchase order). By tracking the underlying causes of payment delay management can determine where they need to focus its attention and whether these problems are being improved over time.
Please keep in mind that this is both an internal and external process. The internal component is an analysis of the efficiency and effectiveness of various credit and A/R management business processes themselves as well as individual employees (or work groups). Efficiency is tied to the cost of a business process (or one of its components), while effectiveness is tied to whether the specified goals are being achieved. You could spend great quantities of cash making a business process work, but that would not be cost effective. Conversely you could reduce costs but not achieve the required goals. Somewhere between these two extremes is the best suited path and that path will depend on your industry and the way you have decided to run your business.
What then needs to be measured and why? The following list is certainly not all inclusive but is intended to help establish a framework to measure efficiency and effectiveness.
Payment Terms: Cash flow can be impacted if payment terms are too liberal. While more lenient payment terms may be a reflection of competitive realities, they may also be used as a quick fix to gain business.
Invoicing Delays: If there is a delay between the time an order is shipped or a service provided and the invoice date, this may be an opportunity for improvement. Users should track both the average delay (general improvement) as well as investigate billing delays for specific invoices that exceed a specified limit (specific improvement).
Procedural Errors: The failure to meet a customer's business process requirements (purchase order number, invoice formats, pricing, even number of invoice copies) will lead to payment delays. These procedural errors need to be segregated by type, tracked, and continuously improved.
Service Disputes: If a customer does not pay on time due to an identifiable dispute or problem (goods or services are not provided on time, poor quality, or any other reason that can be tracked), cash flow will be negatively impacted. These specific problems need to be resolved as quickly as possible (another measurement standard) and they need to be tracked over time to determine if general improvement is being achieved.
Average Days Late: Average days late (ADL) measures a customer's payment history as it relates to the payment terms offered for each invoice. If a customer's ADL is increasing or is higher than average, this should be a trigger to contact the customer, not about a specific invoice, but their payment history in general. ADL may also indicate that a specific A/R representative is not quite as effective as they could be (when compared against other A/R reps). Finally, payment history should be one of the factors sales people consider when discussing future pricing with customers.
In each of the examples above, progress will be made only if identified problems are addressed immediately. This isn't the only solution though. Statistical and historical information need to be collected and tracked. For example, when an invoice becomes overdue, A/R reps need to determine both the classification of the problem (maybe this time it is a procedural error) as well as its specific subcategory (failure to indicate customer purchase order). By tracking the underlying causes of payment delay management can determine where they need to focus its attention and whether these problems are being improved over time.
No comments:
Post a Comment