7 Steps to Optimize A/R Management

For most companies, receivables are the outcome of doing business -- resulting in 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 weak or nonexistent dispute resolution process, and technology that impedes efficiency rather than supports it. Finance staff may struggle to keep money flowing in while satisfying competing management objectives to minimize bad debt loss and maximize sales.

Receivables are among the three largest assets of 75 percent of Fortune 500 companies, according to a 2004 Parson Consulting study, yet most companies lack a strategic approach to managing them. Investments in receivables are not vetted in nearly as systematic a fashion as capital expenditures are, for example.

What are the financial and other benefits that result from a well-articulated accounts receivable management strategy? What are the penalties of a poor strategy, or the lack of any strategy at all?

Narrowly defined, companies manage 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 effectiveness of the cycle is days sales outstanding (DSO), or the number of days during which customers have not paid for purchases.

When the "quote-to-cash" process is well-managed, the accrued benefits can be significant -- 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 receivables and used the money to repay debt, raise dividends, repurchase shares, increase R&D, or make acquisitions.

Solid receivables management can result in a big payoff. One company, a $1 billion mid-Atlantic medical device manufacturer, reduced its DSO to 41 days from 63 days and generated $66 million of cash from receivables, all while grappling with the integration of an acquisition.

As much as the rewards of an effective accounts receivable strategy are quantifiable, the penalties for lacking a strategic approach -- which can be considerable -- are often hidden from plain sight. Consider the increased administrative costs 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 company's reputation as a quality supplier when your accounts receivable department is not integrated with your customer-facing strategies.