steps to optimize a.r. management

Mike Szczechura, National Accounts Manager – Media-Cable-BroadbandJames Stevens & Daniels 1283 College Park Drive, Dover, Delaware 19904

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Your Money Our MissionYour Money Our Mission

Steps to Optimize A/R Management in

Today’s Economy

04/10/23Your Money Our Mission - JSD

Management Inc. 2

Steps to Optimize A/R Management in Today’s EconomySteps to Optimize A/R Management in Today’s Economy

For most companies, receivables are the outcome of doing businessFor most companies, receivables are the outcome of doing business -- -- resulting in resulting in payment from a satisfied customer for the product or service delivered. However, companies lacking a clear payment from a satisfied customer for the product or service delivered. However, companies lacking a clear strategy for managing accounts receivable are losing money without knowing it through poor tracking, a strategy for managing accounts receivable are losing money without knowing it through poor tracking, a weak or nonexistent dispute resolution process, and technology that impedes efficiency rather than supports weak or nonexistent dispute resolution process, and technology that impedes efficiency rather than supports it. Receivables are among the most important assets of a company yet most companies lack a strategic it. Receivables are among the most important assets of a company yet most companies lack a strategic approach to managing them.approach to managing them.

What are the financial and other benefits that result from a well-articulated What are the financial and other benefits that result from a well-articulated accounts receivable management strategy? What are the penalties of a poor accounts receivable management strategy? What are the penalties of a poor strategy or the lack of any strategy at all?strategy or the lack of any strategy at all? Narrowly defined, companies manage accounts Narrowly defined, companies manage accounts receivable assets through credit control, collections and payment processing. However, "accounts receivable assets through credit control, collections and payment processing. However, "accounts receivable" is more usefully defined as the entire "quote-to-cash" process. A common measure of the receivable" is more usefully defined as the entire "quote-to-cash" process. A common measure of the effectiveness of the cycle is “days sales outstanding” (DSO), or the number of days during which customers effectiveness of the cycle is “days sales outstanding” (DSO), or the number of days during which customers have not paid for purchases. have not paid for purchases.

When the "quote-to-cash" process is well-managed, the accrued benefits can be When the "quote-to-cash" process is well-managed, the accrued benefits can be significantsignificant -- for example, some companies have enjoyed a reduction of bad-debt risk and expenses by 20 -- for example, some companies have enjoyed a reduction of bad-debt risk and expenses by 20 percent to 50 percent. Some companies have generated cash equaling 10 percent to 40 percent of percent to 50 percent. Some companies have generated cash equaling 10 percent to 40 percent of receivables and used the money to repay debt, raise dividends, repurchase shares, increase R&D, or make receivables and used the money to repay debt, raise dividends, repurchase shares, increase R&D, or make acquisitions.acquisitions.

As much as the rewards of an effective accounts receivable strategy are As much as the rewards of an effective accounts receivable strategy are quantifiable, the penalties for lacking a strategic approach -- which can be quantifiable, the penalties for lacking a strategic approach -- which can be considerable -- are often hidden from plain sight.considerable -- are often hidden from plain sight. Consider the increased administrative costs Consider the increased administrative costs incurred in managing an outstanding payment, the deductions written off because of age, the revenue lost incurred in managing an outstanding payment, the deductions written off because of age, the revenue lost because of a restrictive credit policy with thinly capitalized customers, or simply the effect on your because of a restrictive credit policy with thinly capitalized customers, or simply the effect on your company's reputation as a quality supplier when your accounts receivable department is not integrated with company's reputation as a quality supplier when your accounts receivable department is not integrated with your customer strategies.your customer strategies.


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Traits Showing Best Practices of Fortune 500 CompaniesTraits Showing Best Practices of Fortune 500 Companies

A strategic approach to managing receivables supporting the company's A strategic approach to managing receivables supporting the company's goalsgoals

Communication and enforcement of a shared vision expecting the company to Communication and enforcement of a shared vision expecting the company to be paid according to its termsbe paid according to its terms

The use of key metrics to track resultsThe use of key metrics to track results

Incentives rewarding cash collection on a quarterly basisIncentives rewarding cash collection on a quarterly basis

A robust process resolving issues quickly so disputed amounts are cleared A robust process resolving issues quickly so disputed amounts are cleared and profit concessions minimizedand profit concessions minimized

A continuous improvement process focusing on order fulfillment and invoicing A continuous improvement process focusing on order fulfillment and invoicing accuracyaccuracy

The use of technology to automate repetitive functions and prioritize activityThe use of technology to automate repetitive functions and prioritize activity


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Success in Receivables ManagementSuccess in Receivables ManagementWhat can companies do to move from being good managers of receivables to great ones?What can companies do to move from being good managers of receivables to great ones?

Get a strong commitment from senior management to do what it will take Get a strong commitment from senior management to do what it will take to improveto improve

Strive to improve accuracy in order and service fulfillment as well as Strive to improve accuracy in order and service fulfillment as well as invoicinginvoicing

Formulate a portfolio strategy for receivablesFormulate a portfolio strategy for receivables

Accounts receivable can be a financing tool for customers to be used as a Accounts receivable can be a financing tool for customers to be used as a competitive advantage in the marketplace; a source of cash flow to fund competitive advantage in the marketplace; a source of cash flow to fund the business; or a way to generate high-margin, incremental revenue by the business; or a way to generate high-margin, incremental revenue by selling to high-risk customersselling to high-risk customers

For companies that are up to the challenge of taking a hard look at their For companies that are up to the challenge of taking a hard look at their accounts receivables, the payback -- in cash, efficiency and market accounts receivables, the payback -- in cash, efficiency and market perception -- is worth the investmentperception -- is worth the investment


Management Inc. 5

Case Study: The A/R Management PayoffCase Study: The A/R Management Payoff

A $1.5 billion heavy manufacturer delivered big cash and profit benefits by A $1.5 billion heavy manufacturer delivered big cash and profit benefits by improving its management of accounts receivableimproving its management of accounts receivable

The company had numerous divisions making heavy-duty construction The company had numerous divisions making heavy-duty construction materials and engineered products. Its client base was broad and varied, materials and engineered products. Its client base was broad and varied, including contractors (which are often undercapitalized and slow to pay), including contractors (which are often undercapitalized and slow to pay), government agencies and Fortune 100 companies. The company's DSO was in government agencies and Fortune 100 companies. The company's DSO was in the mid-40s-to-50 range -- decent, but not at the level where management the mid-40s-to-50 range -- decent, but not at the level where management wanted it to bewanted it to be

In addition, each division was decentralized, with its own receivables In addition, each division was decentralized, with its own receivables management, metrics and practices. In many divisions, management didn't management, metrics and practices. In many divisions, management didn't see an urgent reason to change and was invested in maintaining the status see an urgent reason to change and was invested in maintaining the status quoquo

How did the company manage the change? First, it conducted an assessment, How did the company manage the change? First, it conducted an assessment, which found that collection processes in the divisions were inconsistent and which found that collection processes in the divisions were inconsistent and credit controls were lenient -- sometimes so lenient that a client company credit controls were lenient -- sometimes so lenient that a client company would go bankrupt before it had paid long-overdue bills. Dispute resolution, would go bankrupt before it had paid long-overdue bills. Dispute resolution, where it existed, was ad hoc. Metrics often measured the wrong datawhere it existed, was ad hoc. Metrics often measured the wrong data


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After reviewing the assessment, After reviewing the assessment, the company implemented the the company implemented the following initiatives:following initiatives:

A redesigned, rigorous collection A redesigned, rigorous collection processprocess

A formal, documented, dispute-A formal, documented, dispute-management process management process

Redesigned reports to enable Redesigned reports to enable managementmanagement

An incentive plan for collection staff to An incentive plan for collection staff to spur performancespur performance

Technological enhancements to Technological enhancements to automate the collectionautomate the collection and dispute-and dispute-management processesmanagement processes

The results in one group out of a dozen:The results in one group out of a dozen:

Cash released from receivables totaled $45 Cash released from receivables totaled $45 million.million. Valued at a 10 percent cost of capital, this Valued at a 10 percent cost of capital, this reduced funding costs by $4.5 million per year.reduced funding costs by $4.5 million per year.

DSO decreasedDSO decreased from 47 days to 36 days over the from 47 days to 36 days over the course of 14 months.course of 14 months.

Bad debt expenseBad debt expense was reduced by $1 million was reduced by $1 million

Total profit improvementTotal profit improvement in the first year in the first year totaled $5.5 milliontotaled $5.5 million


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Your Write Off

And Your Net Profit Is?

2% 3% 4% 5% 6% 10%

You will need the following amount of additional sales to offset the loss

$100,000 $5,000,000 $3,333,333 $2,500,000 $2,000,000 $1,666,666 $1,000,000

$250,000 $12,500,000 $8,333,333 $6,250,000 $5,000,000 $4,166,666 $2,500,000

$500,000 $25,000,000 $16,666,666 $12,500,000 $10,000,000 $8,333,333 $5,000,000

$750,000 $37,500,000 $25,000,000 $18,750,000 $15,000,000 $12,500,000 $7,500,000

$1,000,000 $50,000,000 $33,333,333 $25,000,000 $20,000,000 $16,666,666 $10,000,000

$1,500,000 $75,000,000 $50,000,000 $37,500,000 $30,000,000 $25,000,000 $15,000,000

$2,000,000 $100,000,000 $66,666,666 $50,000,000 $40,000,000 $33,333,333 $20,000,000


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In conclusion:In conclusion:

Time is money and measuring it as such will allow you to look at Time is money and measuring it as such will allow you to look at your gains and losses more accuratelyyour gains and losses more accurately

Thank you for your time!Thank you for your time!

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