Accounting Standards: Top 7 Strategies for Writing Accounting Procedures
By Chris Anderson
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Letís explore the crucial theme of time with a major source on your balance sheet Ė specifically, accounts receivable (A/R). If you have $500,000 or more in accounts receivable then STOP! We have found it again. Why? Because if we focus on reducing your average days collection by 50%, then your accounts receivable balance will fall to $250,000 and the result will be an extra $250,000 in your bank account. So now let's look at specific ways to design your new accounting process.
- Decrease collection cycle. Examine customer accounts that go beyond your terms. Do not wait until twice 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 might offer a discount of 1% if paid within 10 days else net due in 30 days. This is equivalent to 18 % annual interest and most businesses will take those terms.
- Shorten the invoice process. Bill your customers immediately. This is a big one. Many service organizations wait until the end of the month to tally billable hours and determine customer charges. Do not wait until the end of the month. This could reduce your dayís receivable by as much as 15 days right there. Email or fax your invoices to save another day or two (e.g. QuickBooks accounting software contains this feature).
- Reduce billing errors. Most customers delay payments because of invoice errors. Customers wonít recognize the invoice until it is corrected and may not even notify you, the vendor, of the error until you call for collection. Again, avoiding this delay in error and time will amount to cash savings.
- Train Accounts Receivables personnel. Make sure that all personnel involved are training to understand the performance metrics for their jobs. For example, a company will manage $500,000 in monthly A/R balances (thatís $6 Million a year!) using an A/R clerk who makes $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 really managing the money. But, in reality, thatís not the case; the clerk is managing the money day-to-day. So shouldnít the A/R clerk receive 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 clerkís entire annual salary. Isnít the A/R savings worth a little extra time in training?
- Maximize the Accounting Process. With the Accounts Receivable 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 will let your efficiency work for you.
Chris Anderson is currently 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 learn how to increase your business performance, visit: http://www.bizmanualz.com/?src=ART79
Article Submitted On: January 17, 2005