I’m looking to develop an Accounts Receivables Entitlement Model for analyzing and reducing A/R and Days Sales Outstanding (DSO) using the Six Sigma methodology. Does anyone out there have suggestions using 6S projects that delivered significant benefit to the Balance Sheet?
I am also working on DSO reduction. Does anyone have any helpful information? How to properly manager your accounts receivable?
I did a few related projects, one in the collection process and a couple related to different billing processes.
Define your scope: will the project address the credit approval process, billing process, or collection process? Or do you first need to determine which of these processes is top priority? (Billing affects DSO, but the cost of carrying AR on the balance sheet may be very small compared to all the other COPQ of a bad billing process).
For my first project we limited scope to the collection process of commercial accounts. We were working separately with a vendor to implement new credit approval/review processes. Our biggest savings were actually in bad debt write-offs and collection expense reduction. The main changes we made were:
Work individual invoices, not “past due account”
Work large accounts in-house but outsource many smaller accounts to company that was better able to contact customer’s at the appropriate time
Accelerate contact schedule. We shortened the series of dunning letters, but started them earlier and followed up sooner with phone calls, and then accelerated the escalation to placement with a collection agency.
Use Lean as well as SS tools. Look at the wait time between steps before the customer receives billing.
It’s tough to do a meaningful DOE (and can take time), but you can do regression analysis using historical data. Analyzing a group of several hundred accounts outsourced at the same time, we found that the collectability dropped 6% for every 30 days from the last account activity. The age of the oldest invoice on the account was not a significant factor compared with the age of the newest invoice.
Until your processes are consistent and timely and your billing is accurate, don’t get too hung up on the statistics.
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