I can tell everything I need to know about a company by spending 5 minutes in its AR Department . . .
. . . well, almost everything. I’ve done quite a few Gemba walks throughout my career and there is absolutely no substitute to going to the “scene of the crime” and seeing how things are done and asking why they’re done that way. While I’ve spent time in many Call Centers, Manufacturing Lines, and Distribution Centers, I’ve come to believe that no place crystallizes the “operating ethos” of a company more than its Accounts Receivable Department.
The AR folks are at the far end of the processes running the business. If a business’s operations were a marathon route, the AR Department would be at mile 25.5. All of the hard work has been done: the Order has been taken, the Product has been manufactured and put into stock, the units have been picked in the Warehouse and put on a truck for delivery, and the Invoice has been generated and sent. Many of these invoices have even been given fancy terms like “2% 10, Net 30.” Or simply “Net 45.” Literally all that remains to be done is to collect the cash as per these contractual terms. And this, at Mile 25.5, if where I’ve seen things so often break down. Like running a marathon and stepping off the course with the finish line in clear sight.
Imagine walking into an AR Department and seeing stacks of paper invoices piled high in wire baskets. One place has the baskets allocated to people based on letters of the alphabet. I asked why one stack – the “H thru L” stack – was higher than the others and the simple reply was because that person was out on vacation that week. Sticky Notes tacked to computer terminals. Highlighter color-coded invoices languishing on empty desk chairs. Even if the terms are Net 30, I can guarantee that the company’s actual DSO metric is in the 45 to 50-day range. Not an effective way to manage cash.
So what can I tell about this company? That they’re short-sighted. More than likely “Sales-focused” versus “Operations-focused.” That they’re manually-driven. That they don’t trust their systems. That their operating metrics are pointless. That their CFO and Controller probably aren’t getting much sleep.
Conversely, imagine a company that implements a truly comprehensive, end-to-end Quote / Order to Cash system-enabled business process (“Cash” is literally in the process name!) Order data flows seamlessly through the system. Terms are set based on past payment history. Reports are generated automatically to highlight past-due invoices in need of attention. Cash Flow is managed effectively and leverages the ever-increasing interest rates inherent to today’s uncertain business environment.