With the holidays almost over and the New Year right around the corner, Goal Setting is at the forefront of everyone’s mind. If you haven’t already documented 2013’s goals, it’s probably time to get started. With the economy still unsteady, it’s more important than ever that accounts receivable goals are targeted and timely.
The grandpa of all receivables performance metrics is days sales outstanding (DSO). Though DSO is the primary measurement used by most companies, the basic calculation of DSO leads to fundamental flaws in its accuracy as spikes in sales volume, drives down DSO and off-season lows make DSO look out of control. Since we can’t ignore grandpa in his rocking chair, Robert Sherman and I will focus on how to make the calculation more meaningful in a future blog post. However, for the purposes of this article, we will turn away from DSO and look at a two other controllable measurements for AR goal setting.
Percentage of currency, or the portion of the receivable considered current, is probably the single most important goal one can have. If 92% of the portfolio is current, chances are regardless of sales peaks and valleys, the DSO will be favorable. If you have a portfolio running at 60% currency, chances are good that the DSO is high and you have aging receivables not turning into cash.
For projects Capgemini manages, we consider the historical averages of portfolio performance. Factor in seasonal flux or growth through acquisition and you come up with a baseline performance target. From there, it’s easy to adjust up or down depending on the overall growth and performance of your business.
The second target I would set is for productivity. In my post from Sept 24, “The Answer is Productivity!” for every employee with low production, there is another employee at the opposite end of the spectrum that has to pick up the slack. Not enough phone calls to customers, equates directly to cash collected. A good time study works well here.
I would start with a sampling of customers across a few different collectors. Determine how long the average call takes, then use that calculation to determine how many outbound calls a collector can make in an 8 hour period. Not only does this become your daily productivity target, but it also provides you with a way to hold your employees accountable.
While DSO as an AR measurement can’t be ignored, using other AR metrics to augment the focus can help reduce DSO and increase overall AR Performance, pleasing both grandpa and the grandkids alike.