A friend’s company sells millions (good) and made a $400,000 profit last year (okay), but has accounts receivable of $785,000 (bad) that are outstanding for an average of 76 days (horrible). As you can imagine, he is tormented by cash flow problems.
The obvious answer to his problem is to speed up collections, but that’s not so easy in his business. He sells to large national companies whose cultures and bureaucracies combine to create a “take it or leave it” attitude. The good news is that the national companies are good for the money, the bad news is that they’ll pay when it suits their royal highnesses to do so. My friend is suffering but doesn’t want to quit business with the large customers (not yet anyway). So what to do?
After digging into the problem, we discovered that 11 of the 76 days are not due to customer policies but rather to delayed billing. My friend’s company bills national accounts an average of 11 days after they could have billed them.
The 11 day average delay is mainly due to unfinished jobs which in turn are due to little things: missing parts, late starts, poor scheduling, and incomplete paperwork. All of those factors, unlike the receivables themselves, are within my friend’s direct control. He is creating systems to eliminate “go-back” jobs and to hold technicians accountable for unfinished paperwork. His new standards are that every job be finished on schedule (which means technician, parts and materials must arrive on time) and that every job be billed within twenty-four hours of completion (which means the paperwork is complete and on time). He is measuring and tracking results, and everyone knows he is watching.
All of the steps to see that parts arrive on time and that paperwork is finished are “little things.” This article is not about how he is correcting small things but rather to point out that it can be done and is worth doing. Big gains always come through attention to little things. When my friend reaches his goal of twenty-four hour billing, it will liberate $98,000 of cash currently tied up in accounts receivable. (That alone makes the effort worthwhile, but he will also benefit from more jobs done at lower cost.)
How about you? Could you use more cash? Do you do prompt billing? Why not? What can you do to speed up collections? As with all things in business, it’s the little things that matter most.