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Accounts Receivable Collection Goals

Umesh Sutravey's Profile

This could be a basic question, but I still would like to seek your expert advice here. How do I come up with collection GOAL? What is the scientific method to set goals on a quarterly basis?

Answers

EMERSON GALFO
Title: CFO
Company: C-Suite Services
LinkedIn Profile
(CFO, C-Suite Services) |

100% of what is due = collection goal!

Topic Expert
Scott MacDonald
Title: President/Owner
Company: AlphaMac Resources, Inc.
(President/Owner, AlphaMac Resources, Inc.) |

Most industries have a metric on the % of accounts that will be uncollectable. So 100% is unrealistic. Company goals should be set at the industry standard.

You therefore set our goals a little better than industry and design the individual goals for the collections department accordingly.

The key is happy collectors. True collectors are very competitive, so you can reward collectors with prizes, awards and good old fashioned money. Keep the collections department "fun" because trying to get people to pay is a tough job. The more "fun" you let your collectors have, the more successful they will be.

See my course on Credit and Collections for more information. http://bit.ly/1wU0l5O

Umesh Sutravey
Title: Senior Manager
Company: EMC
(Senior Manager, EMC) |

Appreciate the responses!
I agree we should aim for 100% and reward collectors with prizes and awards. But I have a scenario where I have to set goals, start of the quarter itself, which means in the first month of the quarter, I consider opening balance and add next 2 months billings % and arrive at 160% of the opening AR. When I see actual cash after quarter end I notice that cash we have collected either more or less.

I am seeking your help to come up with scientific and more appropriate method so that every quarter I will have clear goals that can be achieved.

EMERSON GALFO
Title: CFO
Company: C-Suite Services
LinkedIn Profile
(CFO, C-Suite Services) |

Bear in mind that A/R, Past Due accounts and collection are heavily influenced by your Sales underwriting process. So it might be a good idea to review that process also.

DSO is also heavily influenced by company policies and how your Sales team negotiates/structure your sales/credit terms. So you might want to take that into account if you use this measure.

As far as your collection is concerned, your basis (and analysis) should be Past Due accounts. If you can pull historical data on the structure of your Past Due accounts, it should serve as a baseline. You can pull it by type of account, total past due vs Total A/R, length of days in outstanding, etc. You can establish that baseline and improve on the structure.

You can't achieve a goal if you do NOT know where you are starting from. Once you know where you are starting from, it will be easy to set your goals.

My personal view is that A/R (those not due) is still in the purview of Sales people until say 5 days Past Due. Account Managers/Sales should still be in the information loop. Depending on your company's policies, you may have the Sales Managers have first crack at collection until it goes say...30 days past.

This is also a CONTROL FEATURE where sales/deliveries are already halted or evaluated once an account begins to turn sour.

As far as "industry standard" is concerned, I view it ONLY as a way to measure your performance against and NOT as a goal.

Overall, as a goal and as a performance measure, make sure that your "Collection Team" is evaluated based on those that they have control over. Your goals should be over those those that they can influence and improve.

Marcel Wiedenbrugge
Title: director
Company: WCMConsult
LinkedIn Profile
(director, WCMConsult) |

Sound credit management is a matter of effective and proactive collaboration between financial teams, commercial teams and the customer. What you ultimately want is getting paid on time, while keeping a good relationship with your customers (you may read my book Happy Customers Faster Cash). This goal should be in line with corporate goals. How much losses are you willing to take i.e. what is an acceptable percentage for your business? The answer primarily depends on your risk/reward appetite. Credit management is supportive to the business i.e. enabling sales to do more profitable business (and so optimizing the chance of getting paid - on time - for the deals they close). If you want to use a metric, I personally favor Days Beyond Terms, which gives you a clear picture of how your customers actually pay you (make a distinction between disputed and undisputed or 100% correct invoices). Furthermore, put metrics in perspective with corporate goals. However, I rather focus on building a team that understands the importance of communication and relationships (internal, external). Are your customers happy with the AR performance / company performance overall. How many pay within the terms that you have agreed upon and if not, what is the reason (root cause analysis). Go for long term customer profitability and make that an overall company goal, not just for the AR or credit management department.

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