Tools for managing accounts receivable – the accounts receivable aging report

We've talked now about how to use DSO as a management tool to monitor your accounts receivable.

And we've talked about how to become more strategic about how to get paid when you have customers who are much larger than you are.

Now we are going to drill down a bit and talk about a tool for diving into the heart of your accounts receivable.

This will help you manage both the speed with which you are collecting money and how well your team is managing accounts receivable at the customer and invoice level.

The Accounts Receivable Aging

The AR aging report is a great tool for your staff charged with turning accounts receivable into cash.

It's also a great management tool for you.

It helps you manage your receivables and how well your staff is performing their job.

Here's a 5-step process for making effective use of the AR aging report.

1. Have your CFO or Controller print the AR aging report and walk you through every account that is past due
2. Discuss the next steps they will be taking on every past due invoice
3. Have them document those next steps in a memo immediately following your meeting
4. Schedule a follow up meeting to track their progress
5. Go back to step 1 (this is an ongoing management process)

Walking through each of the 5 steps will show you whether your staff knows exactly what's going on with every past due invoice.

Warning: have your BS meter handy! Be on the lookout for any sense that your staff is winging it as they talk. Watch to see if they squirm while they talk.

Why? Because there is a good chance they don't have a good, solid, pre-determined approach to systematically collecting receivables.

There aren't bad people. You've just allowed then to get by with a loose process and poor execution. But no more.

It's time to tighten up the process and expect more from your staff.

A strategy that has worked wonderfully for me, especially with a company that has an accounts receivable problem, is to do this meeting every week.

Once the problem is under control, you could consider moving it to once a month.

When Things Are Going Smooth

If you don't have an accounts receivable problem, then I would suggest you do the meeting at least once a month. You will be surprised how effective those meetings will turn out.

Another tip for the meeting is that once you get into a good rhythm (once you have been doing the meetings regularly) consider having your staff prepare the recap memo from step 3 in advance of the meeting.

By that time your staff already knows what will be discussed about each invoice or each customer account. So documenting that in advance, together with setting out their next steps, is a great way to further streamline the meeting.

And it puts more of the responsibility and accountability for managing the accounts receivable process on their shoulders.

It creates a great rhythm since your staff will have come to understand the information you are looking for in the meeting.

So they just capture the update and next steps in writing before the meeting.

It helps shorten the amount of time everyone spends monitoring the accounts receivable process.

And it makes the follow up memo a snap.

Here's a Tip

Another tip to mention is that in many businesses someone in accounting is usually the person charged with collecting.

And it's usually not their primary focus. It is something that has been added to their responsibilities, usually when cash gets tight and you, or the CEO, put some heat on them.

Here's a little insight about most accountants though - they usually hate to collect receivables.

And as a result, they are oftentimes not very good at it.

(Nothing against accountants – since I'm one myself. Just a statement of fact that is important to understand.)

You need to take a good look at who you have in charge of calling customers to turn customer invoices into cash.

Remember…

The only thing worse than out making the sale - is NOT getting paid once you do make the sale. That can turn a great month into an ugly mess that causes loss of sleep – and a skinny bank balance.

Make sure you are always teaching your staff to properly manage accounts receivable.

It can be done in a way that increases cash flow while at the same time helping you further strengthen your relationship with customers.

But it doesn't happen by itself.

Follow the plan!

 

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