Page 142 - Accounting Best Practices

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7–3 Grant Percentage Discounts for Early Payment
nately long time. Additional problems that require time-consuming research may
include an incorrect product price, missing shipping documentation, or a claim
that the quantity billed is incorrect. Consequently, collection problems linger
longer than they should, resulting in slow collections and substandard cash flow.
A good approach for improving the speed of cash collection is to utilize col-
lection call stratification. The concept behind this approach is to split up, or strat-
ify, all of the overdue receivables and concentrate the bulk of the collections
staff’s time on the very largest invoices. By doing so, a company can realize
improved cash flow by collecting the largest dollar amounts sooner. The down-
side of this method is that smaller invoices will receive less attention and there-
fore take longer to collect, but this is a reasonable shortcoming if the overall cash
flow from using stratified collections is improved. To implement it, one should
perform a Pareto analysis of a typical accounts receivable listing and determine
the cutoff point above which 20 percent of all invoices will constitute 80 percent
of the total revenue. For example, a cutoff point of $1,000 means that any invoice
of more than $1,000 is in the group of invoices that represents the bulk of a com-
pany’s revenue. When it is necessary to contact customers for collections work, a
much higher number of customer contacts can be assigned for the invoices over
$1,000. For example, a collections staff can be required to contact customers
about all high-dollar invoices once every three days, whereas low-dollar contacts
can be limited to once every two weeks. By allocating the time of the collections
staff in this manner, it is possible to collect overdue invoices more rapidly.
The stratification approach can also be expanded to include other members of
a company. If there is an extremely large invoice that must be collected at once,
the collections staff can be authorized to request the services of other departments,
such as the sales staff, in making the collection. This approach needs to be limited
to large-dollar invoices, since the sales staff does not want to be making collection
calls all day. However, using the stratification approach, it is reasonable to request
their assistance in collecting the largest invoices. This approach is very effective
for accelerating the collection of large overdue accounts.
Cost: Installation time:

7–3 GRANT PERCENTAGE DISCOUNTS FOR EARLY PAYMENT

Some companies have large customers that pay late all the time. These customers
are important to the company, and the customers abuse the one-sidedness of the
relationship by stretching out their payments. In these cases, a company has little
leverage, for it will lose a significant volume of sales if it cuts off the errant cus-
tomers or cuts back on their credit limits.
In these cases, a company may have no choice other than to grant an early
payment discount to customers in order to bring in cash sooner. This approach is
especially effective if a company is in immediate need of cash. Also, accounts