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Home  > Article

Top 7 Strategies For Writing Accounting Procedures

By Chris Anderson

When you're starting a business, defining accounting procedures is important. With well-defined processes and procedures in place, you will increase efficiency and get your business started right.

Laying the Foundation

Last week, we raised the question: what would your business do
with $1,000,000? To lay the foundation we introduced inventory
as the first of four areas that will lead toward our million
dollar goal. And you saw exactly how to achieve the first
$250,000 in cash savings by avoiding delays with an increase
in velocity, as well as an increase in discipline and
competency. But how exactly? With time? as you saw with
inventory and as you'll see this week.

Tackling Accounting Procedures

Let's continue that crucial theme of time with another major
source on your balance sheet specifically, accounts
receivable (A/R). If you have $500,000 or more in accounts
receivable then STOP! We have found it again.

Reducing Average Days Collection

Why? Because if we focus on reducing your average days
collection by 50%, then your accounts receivable balance will
fall to $250,000 and the result will be an extra $250,000 in
your bank account. And just like that, we're halfway to our
$1,000,000 goal.

So now, let's see how this actually works in a real-life
business scenario.

Accounting Procedures Service Business Example

A service organization with $700,000 in average A/R balances
needed assistance. So we examined their A/R function to
understand and quantify the workflow and workload issues. Then
we designed and implemented a process to improve the A/R
performance.

The metrics we developed reduced their over 60 accounts
receivables by 85% and their overall A/R balance by 50% within
90 days of implementing the new procedures. With these new
processes and reports, the company now tracks Average Days
Collection and past due rather than just Days Sales
Outstanding (DSO) as the measure of their collection
effectiveness.

The result: an extra $350,000 in cash. And, again, we
explicitly see the crucial role of time and how an increase in
velocity and discipline directly yields an increase in
efficiency and cash savings. So how can you use time to your
advantage?

Methods to Design the New Accounting Process

Decrease collection cycle. Examine customer accounts that go
beyond your terms. Do not wait until twice the net terms to
take action.

Tighten credit policy. Examine credit process for slippage. Do
you have a credit approval process? Do you perform credit
checks? What standards are used to extend credit?

Reduce credit terms. Change the credit terms you offer your
customers. If you offer terms of net 45, reduce it to net 30.
You might offer a discount of 1% if paid within 10 days else
net due in 30 days. This is equivalent to 18 % annual interest
and most businesses will take those terms.

Shorten the invoice process. Bill your customers immediately.
This is a big one. Many service organizations wait until the
end of the month to tally billable hours and determine
customer charges. Do not wait until the end of the month. This
could reduce your day's receivable by as much as 15 days right
there. Email or fax your invoices to save another day or two
(e.g. QuickBooks accounting software contains this feature).

Reduce billing errors. Most customers delay payments because
of invoice errors. Customers won't recognize the invoice until
it is corrected and may not even notify you, the vendor, of
the error until you call for collection. Again, avoiding this
delay in error and time will amount to cash savings.

Train Accounts Receivables personnel. Make sure that all
personnel involved are training to understand the performance
metrics for their jobs. For example, a company will manage
$500,000 in monthly A/R balances (that?s $6 Million a year!)
using an A/R clerk who makes $30,000. But then the supervisor
uses nothing more than On-The-Job (OJT) training for the
clerk. Then the CFO thinks that he or she (the CFO) is really
managing the money. But, in reality, that?s not the case; the
clerk is managing the money day-to-day. So shouldn't the A/R
clerk receive enough training to manage such a significant
amount? After all, it only takes a 6% change in A/R in one
month to equal the A/R clerk's entire annual salary. Isn't the
A/R savings worth a little extra time in training?

Maximize the Accounting Process. With the Accounts Receivable
department you should use each element of the process to gain
the most benefit for your business. And with time-saving
procedures set in place, you will let your efficiency work for
you.

Grabbing Your Policy Goal

With well-defined processes and procedures in place, you will
increase efficiency by reducing your Average Days Collection.
And of course a reduction in Average Days Collection means
your Accounts Receivable balance will also fall, creating more
cash in cash on hand. And just like that we're halfway to our
$1,000,000 goal. All you have to do is grab it.

Next week, we will look at finding still another $250,000 in
the Sales function, which will give us $750,000 toward our
goal of 1 Million in cash savings. So, again, not only do you
aim to reap the rewards of extra savings to your bottom line,
but also see more cash in the bank - $1,000,000 cash to be exact.


Chris Anderson is currently the managing director of Bizmanualz, Inc. and co-author of policies and procedures manuals, producing the layout, process design and implementation to increase performance. To learn how to increase your business performance, visit: http://www.bizmanualz.com/?src=ART79







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