Description
Reducing Delinquent Accounts Receivable If you can’t measure it, you cannot improve it. ―Lord Kelvin April 14, 2014, found Christine Taylor, the chief operating officer for Wolf Distributing, staring at the delinquent AR report―those accounts receivable (AR) unpaid for longer than 90 days. The list had been growing over the past several months and currently contained 800 open invoices (see the Reducing Delinquent AR Data spreadsheet that accompanies this case). Of Wolf Distributing’s 150 customers, 32 of them were delinquent in their payments. Taylor was not quite sure what to do, but she had to figure it out fast; Georgia Wolf, the owner and CEO of the company, wanted answers by the end of the month on how to stop the bleeding. At its highest point, in January 2014, the company’s delinquent invoices totaled only 3.6% of the total AR of $6,470,889 (or $232,952), but as a general rule, the longer money goes uncollected, the more difficult it is to recoup. And for Wolf Distributing, a small business operating on very low margins, every dollar counted. Maintaining a positive cash flow was key to avoiding a slide into the credit abyss—and to keeping the company financially viable. Taylor knew her team was working diligently to resolve and get ahead of the AR backlog, but it seemed that for every step forward, a new development set them two steps back. With some open invoices dating back to January 2012, Taylor realized that the status quo was no longer working; she and her team needed a new approach. Instead of chasing down each open invoice individually, perhaps they needed to develop some sort of grouping or prioritization scheme. Wolf Distributing Wolf Distributing LLC was a distributor of Berserker Rage energy drink, serving the areas of Rockford, Peoria, greater Chicagoland, and northern Indiana. Since its founding in 2000, Wolf Distributing had grown to become the second-largest distributor of Berserker Rage in the world. The company’s market share was 44% of the energy drink category in the Chicago area. Headquartered in Elmhurst, Illinois, Wolf Distributing employed 150 staff at the start of 2014. The approximate workforce breakdown was 70% sales, 15% warehouse, and 15% administrative staff. In addition to a distribution center in Elmhurst, the company owned and For the exclusive use of K. ALLAN, 2018. This document is authorized for use only by KIM ALLAN in 2018. REDUCING DELINQUENT ACCOUNTS RECEIVABLE KEL904 2 KELLOGG SCHOOL OF MANAGEMENT operated two others: one in Bloomington, Illinois, and one in South Bend, Indiana. In 2013, the company’s sales were $84 million. Wolf Distributing’s owner, Georgia Wolf, had learned early in her career the importance of maintaining a positive cash flow. To ensure the viability of her company, she hired—and trusted—sound financial people and was careful to not grow the company too fast. Accounts Receivable Accounts receivable is money owed to a firm in consideration for either goods or services.1 It is essentially a line of credit (analogous on the consumer level to the use of credit cards). No standard, universal approach exists for reporting and addressing AR problems. Although there are a number of methods and tools for understanding and analyzing AR, these are typically customized to best fit the needs of the firm using them. To understand AR, firms typically use an aging report, which is just a list of companies that have not paid their bills within a certain timeframe. (Typical timeframes are 30, 60, and 90 days.) Aging reports may be sorted by the number of days open or by the amount owed. Firms also use trend reports to both understand and analyze outstanding AR. A simple trend report is a graph of the amount of AR over a period of time (typically a month). AR days, defined as the average number of days a company takes to collect payment on goods sold, is another measure firms can use to understand the problem.2 Wolf Distributing used the following formula for AR days: (Open AR / Monthly Revenue) × 30 Days. Wolf Distributing had tried the approaches outlined above, but had not seen a significant decrease in the number and dollar value of its delinquent AR (see Figures 1 and 2 below). Further, clearing up old AR required a considerable amount of administrative overhead, which took time and resources from the department. In addition, some customers would not repay old AR unless it was disputed within a certain time period (typically 90 days; sometimes 75). All in all, the company spent a lot of time chasing customers in a piecemeal fashion. Finally, the somewhat cyclical nature of the business meant that the carrying costs during high-volume months often required relying on credit. Fortunately, except for those high-volume months, Wolf Distributing was essentially debt free; firms that carry debt generally find that aging AR places incremental pressure on their finances in the form of more interest.