As Credit Manager, you probably meet with your company CFO, Treasurer or Controller (depending on how your company is structured) on a regular basis to review accounts receivable, collections and cash flow. While these executives care about how well a credit department is operating, they are not usually interested in reviewing the metrics which measure day-to-day credit department efficiency. A CFO and other executives are interested in reviewing reports which tell them about the status of accounts receivable, collections and cash flow.
A CFO needs to be very knowledgeable of this information so that key constituencies of the company can be kept informed as required. The constituencies that need to be informed of a company’s financial performance and position including the status of accounts receivable, collections and cash flow can include the following among others:
- Company management
- Creditors
- Investors
- Suppliers
- Government agencies
Here are our ideas on developing the reports your CFO cares about.
REPORTING METHOD
If you have an automated accounts receivable platform that has dashboard capability, use the dashboard to report accounts receivable Key Performance Indicators (KPI). Many CFOs prefer to start with top level information and drill down for answers themselves or ask the credit manager for answers. They don’t want to sit through long meetings or have to digest lengthy formal reports.
Find out how your CFO prefers to view information, and focus on providing the desired reports with a minimum of extraneous information included.
KEY ACCOUNTS RECEIVABLE REPORTS
DAYS SALES OUTSTANDING (DSO)
Probably the most widely used accounts receivable measure, DSO measures accounts receivable in terms of the number of days sales outstanding. Since it is dependent on sales volume, DSO can be difficult to evaluate on a comparative basis. Tracking DSO trends is useful in understanding this metric.
COLLECTION EFFICIENCY INDEX (CEI)
CEI measures accounts receivables collected in a time period compared to the amount of receivables available for collection in the same period. This methodology eliminates the swings in sales numbers and takes credit terms into consideration. It gives a clearer picture of accounts receivable at a point in time than DSO.
ACCOUNTS RECEIVABLE MORE THAN 60 DAYS PAST DUE
In addition to the possible impact on cash flow, this metric focuses on seriously past due receivables. These receivables can influence credit agreements and estimates of bad debt allowances.
Asset based lending agreements may exclude these receivables reducing the amount available to borrow, and other loans may have covenants limiting the amount of these receivables which a company may have. An increase in these receivables may require an increase in the general bad debt allowance.
TOP 10 COLLECTION ACCOUNTS
The status of collection accounts needs to be reviewed regularly for possible impacts on cash flow, credit agreements and bad debt allowances.
CFO’s want credit reports which give them the information they need for various constituencies. They want this information to be easy to access and understand. Providing the accounts receivable reports your CFO cares about is much easier and more reliable if you have an automated accounts receivable system.
Automated accounts receivable, credit and collection software is available from Lockstep Collect, the leader in cloud-based software solutions made specifically for businesses selling on credit.
