We frequently hear the term “Accounts Receivable” and I often wonder if it is consistently understood. It is considered an important factor in a company's working capital, let me explain why (in layman’s terms).
Accounts Receivable can be too high. If your Accounts Receivable is too high, the business may be at fault, possibly the team is a bit lax in collecting what is owed or your processes may be too vague or ad hoc. The major risk of this approach is the impact on cash flow and your business may quickly find it is struggling to find the cash to pay bills.
Accounts Receivable can be too low. If your Accounts Receivable is too low there is a risk that you are putting a strain on your customer relationships. It is possible your payment terms are harsh, perhaps customers find it challenging to meet your terms. In practice, Accounts Receivable levels normally correspond with changes in sales levels.
Other Uses of Accounts Receivable. It is worth remembering that businesses may occasionally use their Receivables as collateral for borrowing money. The level of Accounts Receivable also affects other financial performance measures including working capital, days payable and the current ratio.
Another interesting point is that Uncollectible Receivables do not qualify as assets (these uncollectible amounts are reclassified to the allowance for doubtful accounts, which is essentially a reduction in receivables); thus, companies usually allow only creditworthy customers to pay days, weeks or even months after they've received the company's services or goods. Sometimes companies sell their receivables for pence in the pound or outsource the collection work to other companies that specialise and focus solely on collecting the owed amounts.
Here’s a simple example of how it works. Let's assume that Company XYZ sells £1 million of widget parts to a widget manufacturer and gives that customer 60 days to pay for those parts. Once Company XYZ receives the order and/or sends the parts and/or sends the customer an invoice, it will decrease its inventory account by £1 million and increase its accounts receivable by £1 million. When 60 days has passed and Company XYZ is paid, it will increase cash by £1 million and reduce its Accounts Receivable by £1 million.
Accounts Receivable is an asset, and as such, it appears on the balance sheet. In particular, Accounts Receivable is a current asset, meaning that the amount owed is expected to be received within the next 12 months.
When Accounts Receivable go down, this is considered a source of cash on the company's cash flow statement, and as such, it increases the company's working capital (defined as current assets minus current liabilities). When Accounts Receivable goes up, this is considered a use of cash on the company's cash flow statement because the company is "stretching out" the time it takes to receive money owed to it and thus is using cash more quickly.
If you think that your business would benefit from a review of your Accounts Receivable, please contact me at JohnEnnis@thorntonhope.co.uk.
We have the
pleasure of working with both public and private sector clients and we find that there
are many common issues that apply equally to both areas. However, in our experience there are also some
challenging areas that are particularly relevant to the public
sector. In today's blog, we sum up the public sector challenges we see and include our thoughts on how to tackle them.
Increasing pace of change. There’s still a degree of “catch up” going on in the public sector. As the external environment changes and society’s expectations of service delivery alter accordingly, the impact on the public sector is significant. And it is fast. We have seen how important it is for public sector organisations to embrace the pace of change required, we have helped organisations, departments and teams adapt and to move quickly in order gain financial benefit for change and transformation programmes.
Technological developments. There is widespread expectation of online and mobile engagement which has a direct impact on communication with customers and service users. Therefore it is critical to train staff and set up teams in a way that helps them handle a different level of engagement that is suited to the customers’ communication preferences, 24/7.
Service expectations. Many brands promote the importance of tailored services to such an extent that it becomes what
everyone expects. This means a more personalised approach tailored to specific customers may be needed (which is not what the
public sector is used to). Public sector teams may not have the appropriate skill-set or organisational set-up to meet customer needs. This highlights the importance of public
sector organisations communicating a strong vision internally and externally to improve staff understanding and
motivation for a modern organisation.
Involvement. It is increasingly common for the general public to want and to expect to be asked, involved and to be taken seriously about issues that affect them, including public services. Therefore an emphasis on customer focus and establishing channels for two-way communication are key to the effectiveness of future services provided by public sector teams.
Changing staff motivations. It has been suggested that job security may not be as strong a motivator for young people as it used to be. This has traditionally been the major pull of the public sector to attract staff and makes it increasingly difficult to find the right people with the right skills who don’t perceive the public sector as the place for them. Additionally staff who have been working in the public sector for many years sometimes find the changing environment challenging, therefore strong leadership and management of change programmes is critical.
If you would like further information about how we can help your organisation
please contact Linda Taylor on 0141 242 4450.
For many businesses there are several benefits to be gained from outsourcing Credit Control. Probably the most obvious one is that it means your Credit Control will be done by a team of experts - Credit Control is their job, it isn’t an extra duty being squeezed in to a packed schedule of other higher priority tasks. Outsourcing your Credit Control will mean that it will always get done and will never be at the mercy of that common excuse of something more important coming up.
Let’s face it, what could be more important? This is about getting paid, it’s also about protecting valuable business relationships and it is about achieving an accurate picture of the financial status of your business. Let’s take a look at some of the other benefits of outsourcing your Credit Control.
If you were to manage your Credit Control in-house, you would need to invest in the right technology. You would need to select a debtor management system to meet the needs of your sales cycle, is aligned to your business and can provide you with the data you need to ensure accurate performance reporting. You would need to have a clear understanding of what you would need the system to do to ensure you can make the right choice and you would need to have the budget to select the most effective system for your business. Of course choosing and funding a system is only part of the picture, you would also need to keep it bang up to date and have an ongoing training programme to ensure your staff operate, input and maintain it correctly. However by outsourcing your Credit Control, you won’t have to consider this significant investment - let the investment in technology and the ongoing system management be someone else’s concern.
What people skills are needed to be a successful Credit Controller, what are the (ongoing) training requirements and where will you find a reliable and effective source of Credit Control staff? Finding and building an effective team of skilled Credit Management experts who are focussed entirely on Credit Control is challenging. Many businesses are skilled at identifying the people and skills they need when they are recruiting for their core business. Outsourced Credit Control specialists have already established the right skill set, they understand the unique combination of negotiation, service and sales skills required. They are experts in this area because this is their core business.
Another major benefit of outsourcing Credit Control is the improvement it can mean to your customers because effective Credit Control can identify and help to resolve upfront defects. If your customers are regularly frustrated by failures in other process areas, e.g. billing, sales or pricing, outsourced credit control will help to resolve these.
Having an accurate picture of the health of the financials of your business is essential to developing your business profitably. By outsourcing your Credit Control you will immediately gain improved data, meaningful analytics and useful MI to help you focus on running your core business.
The ability to alter the volume of resource to meet the needs of an irregular sales cycle is a significant benefit of using an outsourced team. Rather than having the distraction at busy times of having to recruit and train staff to manage short term increases in workload, your outsourced team will be set up to increase or decrease the resource focussed on your business to suit your timing, at short notice.
This post is designed to go beyond the basics of Credit Control and challenge the ways within which credit teams are organised, the technology and strategies they use and the team’s place within the wider business.
What’s your Credit & Collections Plan for the year ahead?
It helps if your actions have a purpose. Few people can afford to wake up, turn up for work and hope for the best. This time of year is perfect for credit & collections planning, giving you direction to help you lead and motivate your team – from developing effective guidance to the issuing of accurate instructions – planning your credit management programme for the year ahead can be a really useful tool to help you deliver what your business needs.
In my experience, success is more likely if you have a specific goal in clear sight – on a daily, weekly, monthly and annual basis.