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Top Strategies for Performing an Accounting Analysis |
During an accounting analysis, the most efficient use of money is the goal. Having more money in your possession is always more efficient than someone else using it. Therefore, the accounting analysis goal is to physically save the most money through accounting procedures as possible.
Let’s look at a major opportunity for savings located on the balance sheet, specifically, accounts receivable(A/R). If you have $500,000 or more in accounts receivable then we certainly have found a great place to start shaving off inefficiencies.
Focus on reducing time in average day's collection. Because if we can reduce the collection time 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, you've added serious additional operating capital. So, let’s see how this accounting analysis 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. Through this accounting analysis, 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 is 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 Accounting Analysis
Decrease the collection cycle time. Examine customer accounts that go beyond your time limits. Do not wait until twice the allotted time to take action.
Tighten credit policy. Examine the 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 45 days, reduce it to 30. You might offer a discount of 1% if the balance is paid within 10 days or else the net amount is due in 30 days. This is equivalent to 18% annual interest and most businesses will agree to those terms.
Shorten the invoice process. Bill your customers immediately. This is a big one. Accounting analysis shows that 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 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 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 training(OJT) for the clerk. In reality, 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 analysis 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.
By performing an effective accounting analysis you can set in place, well-defined processes and procedures. This will increase efficiency by reducing your average day's collection. And, of course, this reduction means your accounts receivable balance will also fall, creating more cash on hand. To start off the accounting analysis, Peachtree accounting software is a tool to gather and process the accounting information.
About the author:
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.
Circulated by Web Shepherd
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