Get WakeField
No Result
View All Result
Thursday, January 12, 2023
  • Business
    • Finance
    • Legal
    • Career
    • Retail
    • Economy
    • Real Estate
    • Vehicle
    • Reviews
  • Technology
    • App
    • Electronics
    • Cryptocurrency
    • Gadget
    • Internet
    • Games
    • Startup
  • Money
    • Investing
    • Retirement
    • Insurance
    • Taxes
  • Health
    • Medical
    • Fitness
    • Diet and Nutrition
    • Living Well
    • Recipes
  • Lifestyle
    • Fashions
      • Style
      • Accessories
      • Grooming
    • Beauty
    • Entertainment
    • Parenting
    • Food
    • Spirituality
    • Travel
    • How to
    • Education
    • Holidays
  • Home & Kitchen
    • Furniture
    • Cleaning
    • Decoration
    • Garage
    • Do It Yourself
    • Home Improvement
    • Kitchen
    • Safety
    • Tools
    • Gardening
  • Pets
  • Buying Guides
Guest Post
Get WakeField
  • Business
    • Finance
    • Legal
    • Career
    • Retail
    • Economy
    • Real Estate
    • Vehicle
    • Reviews
  • Technology
    • App
    • Electronics
    • Cryptocurrency
    • Gadget
    • Internet
    • Games
    • Startup
  • Money
    • Investing
    • Retirement
    • Insurance
    • Taxes
  • Health
    • Medical
    • Fitness
    • Diet and Nutrition
    • Living Well
    • Recipes
  • Lifestyle
    • Fashions
      • Style
      • Accessories
      • Grooming
    • Beauty
    • Entertainment
    • Parenting
    • Food
    • Spirituality
    • Travel
    • How to
    • Education
    • Holidays
  • Home & Kitchen
    • Furniture
    • Cleaning
    • Decoration
    • Garage
    • Do It Yourself
    • Home Improvement
    • Kitchen
    • Safety
    • Tools
    • Gardening
  • Pets
  • Buying Guides
No Result
View All Result
Get WakeField
No Result
View All Result
Home Business

What CFOs Need to Know About Collections

by iTechMedia
January 22, 2021
in Business, Finance
0
CFO-Tech-Advice
2k
VIEWS
Share on FacebookShare on Twitter

By Dean Kaplan, CEO and President, The Kaplan Group

While many CFOs are well-versed in ROI, tracking and controlling expenditures, accounting rules and all the other elements of a company’s bottom line, some are uninformed about collections and the collections process. For companies that extend credit to their customers, accounts receivable can be one of the largest assets on the balance sheet.  Making sure this asset is healthy should be a high priority. You want to regularly turn it into cash critical for the businesses’ success. A poorly managed accounts receivable department can lead to slow payments, cash flow issues, and unnecessary losses.

What to Track

There are two metrics commonly used to measure collection performance.

DSO

The Days Sales Outstanding (DSO) ratio shows how many days, on average, it takes you to collect on your sales. DSO is calculated by dividing accounts receivable by the total value of credit sales during the same period. Then, multiplying the result by the number of days in the period measured.  For example, if sales on credit average $10 million per month and your accounts receivable balance is $20 million, your DSO is $20M/$10M x 30 days = 60.  This is a key measure in being able to forecast cash flow.

Higher DSO means it takes longer to turn sales into cash, requiring the company to have more working capital.  It may also be an indicator that management is not focusing on keeping accounts receivable in line. Or, that the company sells to riskier customers or is giving longer terms to obtain sales. 

It is important to look at DSO not only at a single point in time to measure current effectiveness and risk, but also over time to measure performance.  If DSO is increasing, this could be a red flag.  If DSO decreases, especially in comparison to competitors, this may indicate that the company’s credit risk policy is too conservative. The company might be missing viable sales opportunities.

CEI

Another key metric is the Collection Effectiveness Index (CEI). CEI is a calculation of a company’s ability to collect money from their customers. While DSO provides a good cash flow measurement, CEI specifically targets collection proficiency.  To calculate CEI, compare the amount collected in a given period to the amount of money that could possibly be collected. You can determine the total amount of potentially collectable receivables by adding the beginning accounts receivable balance and monthly credit sales and then subtracting the ending total receivables balance. Divide the denominator. Calculate the denominator by adding the beginning accounts receivable balance and monthly credit sales and then subtracting the ending current receivables balance.

For example, if beginning receivables was $20 million, monthly credit sales was $10 million, ending total receivables was $22 million and ending current receivables was $18 million, the CEI would be ($20M + $10M – $22M)/($20M + $10M – $18M) = 67%.  A CEI of 80% to 90% is considered satisfactory. A lower CEI typically is an indication of problems in managing accounts receivable and possibly also the collection process.

How to Fix a Problem

Imagine your CEI is at 50%, or perhaps it was previously at 85% and is now at 75%. You know you need improvement, but the first thing to do is figure out what is causing the problem. 

Is it a problem in your invoicing or collection process? Are invoices going out quickly and accurately? Do you snail mail invoices or send them electronically? Are you confirming with your customers that they have received the invoices?  Do you follow up immediately after they were due and consistently thereafter? Are you dealing with problems quickly?  Do you escalate pressure as soon as you realize you can’t solve the problem? 

Or perhaps DSO is high while CEI is good? This indicates that possibly your credit risk policy or evaluation process has changed.  Is your sales force compensated at the time of sale or when money is collected? Are you asking for deposits up front to keep DSO lower?

Using a Collection Agency

No matter how good your policies and procedures are, any company that sales on credit will eventually have unpaid receivables. By the time an invoice is 90 days past due, there is a 25% chance it will never get paid.  If it gets to one year old, there is only a 27% chance it will ever get collected.  While this may represent only a small fraction of credit sales, if you don’t take action it is lost revenue.

Most reputable collection agencies charge on a contingency basis. Sending your invoices to a collection agency is a risk-free way of getting the money you are owed. Using a collection agency for older invoices can improve your DSO and CEI. A collection agency can free up your Accounts Receivable staff to work with your paying customers. This allows your customers to keep purchasing more from your company.

The collections process is an important part of your bottom line. Just like lawyers and accountants, collection agents can be important partners for your business.

Dean Kaplan is president of The Kaplan Group, a commercial collection agency specializing in large claims and international transactions. He has 35 years of manufacturing, international business leadership and customer service experience. Today, he provides business planning, training and consultation to a variety of global companies.

Tags: Collection Effectiveness IndexDays Sales Outstanding (DSO)The Kaplan Group
  • Trending
  • Comments
  • Latest
fashionable streetwear

My Honest Review of KCLOT After Getting Multiple Orders from The Site

February 28, 2021
Mystical Agriculture Wiki

The Tried and True Method for Mystical Agriculture Wiki in Step by Step Detail

May 31, 2019
connect WIFI Router to Smart TV

How to connect WIFI Router to Smart TV

October 18, 2019
carb cycling meal plan for females

4 Tips: How Carb Cycling Meal Plan for Females Help in weight loss?

November 3, 2019
genuine N95 masks

Where can you buy online American made medical masks and N95 respirators?

1
Kimberly-Clark N95 Duckbill Mask

The Kimberly-Clark N95 Duckbill Mask: Protecting Healthcare Workers on the Frontline

0
instant-photo-printer-770x513

4 Key соnѕidеrаtiоnѕ before buying an instant photo printer

0
Top-Future-of-Solar-Energy-Reviews-770x513

Top Future of Solar Energy Reviews!

0
Kimberly-Clark N95 Duckbill Mask

The Kimberly-Clark N95 Duckbill Mask: Protecting Healthcare Workers on the Frontline

January 12, 2023
Asus ROG Phone 3

Asus ROG Phone 3: The phone’s max power is hard to exploit

December 17, 2022
Where to Buy N95 face Masks

N95 face masks made in the USA: Why they’re the best

December 3, 2022
personal attorney in Connecticut

Four Reasons Your Lawyers Are Worth Your Money

November 24, 2022

Recent News

Kimberly-Clark N95 Duckbill Mask

The Kimberly-Clark N95 Duckbill Mask: Protecting Healthcare Workers on the Frontline

January 12, 2023
Asus ROG Phone 3

Asus ROG Phone 3: The phone’s max power is hard to exploit

December 17, 2022
Where to Buy N95 face Masks

N95 face masks made in the USA: Why they’re the best

December 3, 2022
personal attorney in Connecticut

Four Reasons Your Lawyers Are Worth Your Money

November 24, 2022

Categories

  • Accessories
  • Animal Rescue
  • App
  • Beauty
  • Business
  • Buying Guides
  • Career
  • Cleaning
  • Cryptocurrency
  • Decoration
  • Diet and Nutrition
  • Do It Yourself
  • E-commerce
  • Economy
  • Education
  • Electronics
  • Entertainment
  • Fashions
  • Finance
  • Fitness
  • Food
  • Furniture
  • Gadget
  • Games
  • Gardening
  • Gifts
  • Grooming
  • Health
  • Holidays
  • Home & Kitchen
  • Home Improvement
  • How to
  • Insurance
  • Internet
  • Investing
  • Kitchen
  • Legal
  • Lifestyle
  • Living Well
  • Management & Leadership
  • Medical
  • Money
  • Parenting
  • Pet Behavior
  • Pet Care
  • Pet Food
  • Pet Health
  • Pet Training
  • Pets
  • Real Estate
  • Recipes
  • Retail
  • Reviews
  • Safety
  • Security
  • SEO
  • Services
  • Software
  • Startup
  • Style
  • Technology
  • Travel
  • Treatment
  • Uncategorized
  • Vehicle

Site Navigation

  • Home
  • Contact Us
  • Privacy & Policy
  • Other Links
Get WakeField

Our mission is to focus on curating the best niche-specific content in the fields of technology, education, health, fitness and beauty (to name a few) to allow for our readers to discover content they love.

© 2020 iTech Media

No Result
View All Result
  • Advertisement
  • Contact Us
  • Homepages
    • Home
  • Health
  • Economy
  • Business
  • Reviews
  • Fashions
  • Technology
  • Real Estate

© 2020 iTech Media

Login to your account below

Forgotten Password?

Fill the forms bellow to register

All fields are required. Log In

Retrieve your password

Please enter your username or email address to reset your password.

Log In