“Must Have” Metrics for Receivables Management
Intelligent Credit & Collection Oversight is the Goal
Monitoring and tracking cash is a critically important activity for most small businesses (for more on that subject, check out “Taking the Crystal Ball out of Cash Flow Forecasting”). Since payment of Accounts Receivables (AR) is the primary source of regular cash inflows for most companies, you need to also track your AR to not only maintain its health as well as to better manage it and ensure maximum cash inflow.
The alternative . . . running short of cash can be a disaster! The consequences of not being able to meet payroll, tax, employee health insurance, rent, lease and key supplier payments can seriously impair your firm’s operations, both immediately and well into the future.
One of the biggest challenges for small business executives is finding enough time, so it’s important to efficiently monitor your cash position to avoid disruptive events. The objective involves minimizing the time and effort expended in tracking and reporting on your AR, while optimizing this assets contribution to working capital.
Your accounting software or ERP solution should facilitate the tracking of your AR and thereby save you lots of time. If nothing else, your software should provide an AR Ledger, which is simply a comprehensive listing by customer of every open invoice they owe. Even if your accounting solution isn’t robust, it should allow you to export your AR details into a spreadsheet that can then be used to create the needed reports and metrics. A word of caution: while spreadsheets are a useful tool for tracking issues your accounting solution doesn’t cover, if you bccome reliant on too many spreadsheets to manage your business, you probably should be shopping for more inclusive and powerful software.
Why Are Metrics Needed if You Have an AR Ledger?
Metrics enable you to quickly check the condition of your AR (and cash inflow for the immediate future). If conditions are satisfactory and all your credit and collection assignments have been completed, you can then address the many other tasks and challenges requiring your attention. Unfortunately, this is seldom the case, and by itself the AR Ledger provides very little in context for determining how your receivables are trending.
If there is room for improving the condition of your AR, the typical state of affairs, AR metrics will indicate which element or dimension of the AR is a problem, the magnitude of the problem, and where to direct your attention. For a small business, metrics should not be designed to provide great detail, but rather to display the overall health of the asset (which is one of the largest for most companies), and an indication of where improvement is needed. As such, the AR metrics you track should be arrayed in a brief, easy to review reporting format.
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