Money Lent, Money Lost: Accounts Receivable Management and the Bottom Line

Abstract

Have you ever lent money to someone, only to find them asking for more before they paid the prior amount? Most people decline a request for additional funds after instances of late or non-payment. However, some businesses allow this situation to occur due to mismanagement of accounts receivable. In some cases, management places too much emphasis on increasing sales volume. In others, management doesn’t place enough emphasis on collections. Still others neglect the credit approval process. Regardless of the reason, inefficient accounts receivable management ties up working capital resources. How can we make the value of efficient AR management more salient to our students, accounting and collections staff members, sales team members, and client management?  We analyze the relation between AR efficiency and other financial measures of success by looking for patterns in accounts receivable turnover, days in inventory, accounts payable turnover, the cash conversion cycle, return on equity, return on assets, and profit margin for the 2013-2017 financial statements of six companies. We match these companies by industry and the magnitude of accounts receivable. We calculate the cost of each day of extended collection. We compare profitability indicators with indicators of AR efficiency to gain anecdotal evidence of the impact of AR. Our analysis provides insight about the effectiveness of AR management and the impact of this efficiency on profitability. We plan to use this visual evidence when discussing AR efficiency concepts with students, collection employees, sales staff, and clients.