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Reducing Overdue Account Receivables %

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  • #49104

    R.K
    Participant

    Hi,
    I have been given aΒ project to reduce the % of overdue Accounts receivables for a customer.
    To get the buy-in of the project, I have to show the industry benchmark to the customer. Can anyone help me with Overdue AR % in Business Service Industry?

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    #167232

    Brandon
    Participant

    My experience with this in the SS training industry. Our metric was Days Sales Outstanding – DSO. We established a run rate for gross revenue (say over the past 3 mos.), divided that by 90 days to get a Day’s Sales. We divide this metric into the gross dollar amount of receivables to yield the number of Day’s Sales outstanding in collectibles.
    Since our industry was primarily privately held there was no benchmark. We found that service industries that were public ran a DSO of about 55. Best in class was about 45. At the time we were around 80+. So we set incremental improvement targets and eventually moved our DSO to under 55. To measure financial impact we applied our cost of capital to the dollar amount difference between dollars outstanding at 80+ and the dollars outstanding at 55. Much like the financial analysis for inventory reduction.
    Hope this helps.

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    #167329

    R.K
    Participant

    Hi Brandon,
    Thanks for the reply…..
    Could you further elaborate this statement – ” We divide this metric into the gross dollar amount of receivables to yield the number of Day’s Sales outstanding in collectibles.”
    Suppose my sales are $100m. in 3 months. Days sales work out to be $1.1m.Β My receivables for the 3 months is $50m . Then how do I calculate the no. of DSOΒ 
    regards

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    #167336

    Sea
    Participant

    Another metric I have used is % receivables current.Β  I like this metric because it is very easy to understand and is not influenced by factors like fluctuating sales.Β  It is also more controllable for the folks doing the collecting and allows you to get some of the low hanging fruit.Β  You can have a direct impact on this metric whereas days sales outstanding needs to be a long term target as this relies on changing contracts with customers not just getting what is rightfully yours when it is owed.
    % ReceivablesΒ current is simply the % of total receivables that are not overdue on any particular day.Β  I would monitor this at least weekly to get a good picture.
    I work in manufacturingΒ  not service but we look for % receivables current of over 90% and our best practice is 94-95%

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    #167362

    Brandon
    Participant

    You have taken the correct approach so far. Now divide AR’s by daily sales – $50m divided by $1.1m = 45 days sales outstanding.
    For most industries that’s a pretty good number.
    However, to see what carrying this level of AR’s is costing you multiply $50m by your firm’s cost of capital, say 12% = $6m per year or $500K per month – cost of financing receivables. So a reduction in DSO would lead to AR financing cost reduction.

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    #167366

    Brandon
    Participant

    The metric Jules describes is a good one as well – however DSO relates AR volume to recent period sales. Fluctuations in sales would be expected to create a fluctuation in AR’s as well – they are related.

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    #169678

    Jeff
    Participant

    These are are the metrics we use also. Note that not all improvements made to “% current”Β reflect savings to your company – you’ll need to first understand the causes of your delinquncies. Some might just beΒ miscommunication of terms with your customer.
    Another metric out there is “Collections Effectiveness”. FCIB is an industry group you can contact about this and also benchmark data.

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    #169690

    Dr. Ravi Pandey
    Participant

    Jeff,I just posted a message.Β  Metric is very simple for you – do not have any overdue.Β  If you are talking about benefit/loss due to this, then the answer is different.Benefit has to do with what is asset utilization in your company.Β  Think of this, if they get the money faster, they can invest it for better revenue generation.Β  If they borrow the money for investment, then they have to pay interest – which is called cost of capital.This is simply a case of business management.Β  It has not as much as about six sigma as it is about business decision making.rgds-ravi

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    #169710

    Taylor
    Participant

    Dr Ravi
    Obviously if everyone paid their bills on time, there would be no overdue accounts. Your comment is the biggest DUH I’ve seen today.
    It is however not a simple business management. Each company must understand their customers accounting structure in order to make business decision in which to handle those accounts.
    By benchmarking the industry and tracking customer %overdues, then one can decide how to approach the issue of past due accounts and enter into negotiations with customers on how to make the process more efficient.
    Based on most of your post you have no idea what your doing.

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    #169711

    Brandon
    Participant

    Chad, I agree.
    Ravi –Β “not as much about SS as about business decision making” quote. What the heck do you think applying SS is about? It’s about making better decisions through the use of data and removing variation and non-value……et al.
    Please, Ravi, just read in this forum for a while…because right now you’re not making any sense.

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    #169712

    Dr. Ravi Pandey
    Participant

    Brandon,
    You are right!
    rgds
    -ravi

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