Most business-to-business debt is monitored and collected on a monthly billing cycle. Most vendors send invoices with payment terms detail such as “net 30”, a specific date or EOM (end of month).
Generally, open accounts are billed at the end of a month for the monthly balance owing. Creditors get teach their customers they will wait 30 days from statement to get paid. Some Creditors bill on an invoice basis but send an EOM Statement of Account. The terms on the Invoice contradict the EOM statement.
ADO (average days outstanding) is a key metric used in assessing cash flow and in collection of accounts receivables. But from when do you start ADO? From invoice? From EOM billing? It goes without saying that the faster your company gets paid after the sale is shipped, the better your cash flow. A big problem is that frequently the accounting department, the sales department and the finance department define ADO differently. Best Practices requires that everyone in the company work from the same definition of ADO.
But the decision on how rapidly an invoice or bill is sent isn’t always easy. Who makes the decision varies from company to company. It seems frequently dictated by the technology being used for billing. Or the task is done by an Account Receivable Department that wants a specific date so they can balance workflow or human resources.
If the finance department wants an ADO from date of invoice, the technology may resist specific billing in favor of account wide billing. The “System” may not be “programmed” for promptest payment. And if “The System” is programmed to measure ADO from the EOM billing, that may add from 1 to 29 extra days to the ADO.
Critical event billing is superior for sales that aren’t repetitive. A billing is generated when a big sale is made. That becomes day one.
Start with just the first step. Conduct a company-wide survey of how each department views the money that is owed. Did it hit their sphere of influence on the day of the order, the day of the sale, the day of the shipment, the day of the invoicing or the EOM? If you find variance, management must make a decision and implement a policy. Good Management about all interested parties being on the same page when using a metric of ADO as a cash management technique.
© Martin B. Greenbaum 2013 – 2020.