Becoming a Treasurer Series

Episode 248

Becoming a Treasurer Series, Part 27:
Languages of Finance: Accounts Receivable

What problems arise when treasury and accounts receivable misunderstand each other? In this episode, Craig Jeffery and Jason Campbell jump back into the Languages of Finance sub-series to discuss some of the common terms you need to know in order to work together effectively. Listen in and find us on YouTube for more.


Jason Campbell, Strategic Treasurer

Meredith Zonsius


Craig Jeffery, Strategic Treasurer

Craig - Headshot

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Episode Transcription - Episode #248 - Becoming a Treasurer Series, Part 27: Languages of Finance: Accounts Receivable

Announcer  00:04

Welcome to the Treasury Update Podcast presented by Strategic Treasurer, your source for interesting treasury news, analysis, and insights in your car, at the gym, or wherever you decide to tune in.


Jason Campbell  00:18

Welcome back to the Treasury Update Podcast, Becoming a Treasurer series talking about languages of finance. I’ll be your host for today’s show. Jason Campbell, business development leader here at Strategic Treasurer and chatting with me today is Craig Jeffery, Managing Partner at Strategic Treasurer. Craig, good to have you on today.


Craig Jeffery  00:36

It’s good to be on again.


Jason Campbell  00:38

I think our last episode was was great. You know, I was thinking about when we were talking about accounts payable, you know, think about Twix bar, you know, and the reason I think about Twix bars because they think about like AP and AR being a Twix bar, right, and we just pulled it apart and we talked about left Twix, right which is that Accounts Payable so we did that episode it was great at that we had some really good dialogue now we’re going to talk about the right Twix bar and I’m not paid by Twix to mention twigs on this podcast but we’re gonna talk about the right twigs here and and in this becoming a treasure series, talking about the accounts receivable, you know, we covered FP&A. We talked about controllers definitely had a great conversation around Accounts Payable now moving to accounts receivable because now that we paid vendors, you know, now as being a somebody who works in accounts receivable and looking at saying, hey, now my job is to bring in the cash right? So let’s talk about this. But before we get into the function of accounts receivable, explain again, the purpose of the languages of finance subsidiaries, if you don’t mind.


Craig Jeffery  01:40

I think it’s to relate everything to a candy analogy. You would say Twix, I kept thinking that Trix are for kids, Twix are for kids. And I don’t know, I just got off on that. So I’ll take your word for it, I think I think I think I remember Twix candies, but you know, what’s, what’s the purpose of this? I mean, the idea that there’s words and terms that different people use an organization and motivations and, you know, good communication and effective working relationships means understanding the other. So that’s really the, the Genesis and the continuation of all this.


Jason Campbell  02:19

I will I think for unhealthily, or at least, our listeners will agree to this too, as well, I think you’ve given them some great words of wisdom in each of this as they look for, you know, what a careers look like in the world of Treasury. And, and really, the episodes prior to this. I mean, we dived in, you know, maybe a little higher, high level overview on some of these, but I thought there was some great content around, you know, some good for thinking. And going back to this, how is the language of accounts receivable, though, different from Treasury?


Craig Jeffery  02:48

Yeah, so, you know, the language and the priorities can differ in in a number of ways, you know, and probably the biggest area has to do with priorities. So we can talk about day sales outstanding, you know, the, the average number of days worth of receivables are outstanding, that’s a key measure, for example, for the accounts receivable group. Treasury cares about working capital, that’s a key metric for that it’s easy to capture because it comes from the financial statements, or you take it at the end of the month. Now, the problem with that is if you’re in accounts receivable, is you just focus on making sure everything’s collected by the end of the month, because the snapshots coming at the end of the month, the balance sheet is as at it’s not for the period ending it’s as of a particular period. So they’re looking at the snapshot there. And their measurement about how they’re collecting is is at the end of the month, well, that’s not necessarily the best way to to handle cash flow. It certainly gives some measure consistent, it’s easy, it’s in the financial statements. But that doesn’t get get you everything you need. From a treasury perspective, you need cash every day in Treasury, you can’t just say how does cash look at the end of the month? How low is receivables, how much cash is being absorbed in the accounts receivable process at the end of the month, there’s quite a few other days in the month, you know, 27 to 31 other days. So that’s one, the other has to do with, you know, accounts receivable, if they care about, you know, posting to receivables and reducing that. The key thing for them is posting it in the accounts receivable subledger or in the GL, depending how you’re phrasing it. So when they get receipt or notification that they’ve been paid, it could be an ACH, it could be some other notification that payments coming in or could even be a check or I think maybe they even got a check on their desk, if that is still a thing. But the idea is when they relieve the receivable that adjusts what they have and if they can relieve the receivable before the end of the month, their total receivable goes down whether or not those funds are actually available that they’re liquid to be used by Treasury. So some of that float has Then driven out as we moved away from some of the worst processes with paper. But you can still have that a month, paper items can come into lockbox where items with multiple days of float can be received, you know, what’s been paid for. And you can adjust those on the, on the AR System or on the general ledger, reducing converting those to cash even though it’s not liquid. So that’s a, that’s a second secondary. So, yeah, DSO is a snapshot at the end of the month, and then collected and collected funds. Now, the other thing on some of the different terms, you know, applied versus collected, those are terms that Treasury uses, as does accounts receivable. So if you receive some type of payment, someone, you know, send you an electronic transfer into the bank account. And so AR sees this $22,220,000 payment coming into the account for a particular company, they can they can assign it to a customer, because they know who it is. And then the application process is clearing the individual invoices. Well, let’s say the the records weren’t clear, or they didn’t send the details. So they have this $220,000 receivable, they assign it to the customer, but it’s not applied to the individual invoice level, there’s a whole range of things that can happen depending on how the company is set up. A AR is going to be very concerned about getting applied to the invoice level. Treasury wants to know what can they expect in the future information about the forecast. They want to make sure they can use all the funds, which they probably will from the bank perspective. But there can be some differences there on the Assign assignment and application level. So there’s some of the differences. The other the other one, if I could just keep rambling on for five minutes with that without stopping is AP, I’m sorry, accounts receivable. And we talked about AP the other day receiving payments is oftentimes you’re the you’re the one receiving payments you’re selling, you want your customers to pay you however they want. You might have preferences, but you’re usually accepting different kinds of electronic methods, maybe wire transfer, maybe different kinds of card, you may not care so much about the different methods and how they they matter from a cost perspective, or from a working capital perspective. Treasury does always cares about those things AR may may care about certain aspects of that is to help us be efficient, as long as there’s no problems, they would push people to processes more efficient for them, not necessarily on an overall cost or total cost of a business process perspective. So those are some areas where getting together on those matters.


Jason Campbell  07:54

Again, you mentioned the good points when it talks about you know, again, understanding each role in which function right, because sometimes you can be narrow minded to as well, because your your priorities are different, right? And what Treasury is trying to achieve. And when accounts receivable if my job is to be able to, to collect and categorize on the balance sheet where things need to go and ensuring that invoices are marked where they need to be marked, or, you know, where the funds are coming in. And, you know, to ensure that we’re aligning it correctly. I mean, that’s it’s pretty hefty to think about, you know, that’s that’s what your job function is. And not knowing, hey, somebody else is looking for that money to come in to do with what what is it really funding? What is it trying to be pulled to do? Right, so there’s, I could see, we’re definitely there’s differences between the two. So as we think about understanding those differences, now, let’s go into what what are the problems with misunderstanding each other? I think you kind of talked a little bit about it, but let’s go in a little bit deeper.


Craig Jeffery  08:48

Well, the two the two key areas would be related to process and the other, you know, access to working capital, I think we talked about some of the areas on the working capital, the the DSO, snapshot, different metrics of what are used and you know, Treasury needs available funds, you know, ar, you know, needs to target what occurs to them. And in most in most groups, there’s good communication between treasury and accounts receivable, give us your forecast, what are you going to be able to collect by the end of the month, and even sometimes it’s, we need to hit this number dial for dollars, put pressure to get those things in, by the end of the month. And air groups are really good about pushing and collecting enough funds so that they can hit the forecast and the target that exists. And so that’s a that’s a good example of communication and cooperation, you know, across the board. Other ways about misunderstanding. The other part of that just like the organization can offer, early pay discount, 2%, net 30, for example, or 1% 1%, net 30, whatever the particular terms are. Those can help an organization collect funds sooner that’s that’s used by AR groups to push back put together a lower price on things essentially by paying quickly paying within 10 days or 15 days. But it’s also pretty inconsistent. A smaller percentage of companies can pay earlier or want to pay or they can pay earlier because maybe it’s a capital issue but or a liquidity issue. Or it can be, their approval process is slow and inefficient. And so by the time they get it approved, it’s 25 days, and if the terms are net 30, they’re not gonna pay five days early, because there’s no discount, understanding what the organization is trying to do matters. And so things like some of the supply chain finance options, and what we consider also supply chain finance, dynamic discounting, is a way of, here’s a sliding scale, oh, you got it approved in 20 days, you still want to get this discount, it’s not as much as it was, if you got it approved in 10 days, but you can still get a discount off of the invoice. And for a larger percentage of organizations are like, Okay, this works for us, we we have enough cash, this gives us a discount on their our cost of goods sold, we’re going to pay this early. This makes sense. So that helps the organization leverage early pay discounts or dynamic discounting to, to pull in more cash across the board. And that may be a key financing lever that the organization is using to accomplish that the Treasury wants to use to do that. So coordination between those two is quite vital. What are the key drivers? I know we’ve talked about these Treasury focuses on working capital liquidity. They also don’t want fraud accounts receivables focused on efficiency, and accuracy, right posting these things right away? Where can they are getting in trouble? Well, we didn’t clear the receivable, and now a shipment has been held up. Okay, that’s, you know, the credit group is like we haven’t received payment, here’s an issue. So rapidly posting these items, so they can be cleared so more goods can be shipped and more services can be delivered. And that ties into efficiency, and a well designed process. So not understanding some of the key drivers or differences between those areas may result in a process that’s that’s broken to some extent, or to a large extent, which means interruption to your customers, because you held up a shipment, delays and posting receiving funds. Or even further downstream. I know we talked about reconciliation before, if you if you’ve made a process or using a process where you change the timing, you’ve changed from a gross to a net, you know, let’s say using cards on receivables and things are settling on a net basis and you’re posting in your point of sale system as an a gross base isn’t maybe the cut offs are different. So your daily totals don’t match, you can create all these kinds of issues where there’s a mismatch. And so those are the some of the problems with misunderstanding. Most of them are not terms per se, but understanding thing about the process. And that is That’s a misunderstanding of the process and not paying attention. If I don’t know what you do, you must be doing something really simply that’s obviously false. So the idea is, hey, we need to understand what’s going on, how can we meet all of the goals together?


Jason Campbell  13:16

Yeah, it’s like, I remember going one time to this is a personal story, I remember going into like, it was it was a hospital bill was going in for a procedure or something of that nature. And it was one of those you know, it was have to you have to have a discussion with like the cashier like the the finance manager of the hospital or whatever, right? You go into this little cubicle as I sit down, like, all right, we got your insurance, and we looked at okay, as your deductible and your payments. And you know, how are how are you going to pay for this, but if you if you always get a deal, right, they look at you say, but if you can do this, by this day, or today, we’ll knock off X amount of percentage, you know, a percentage, whatever it is that discount, you know, to to come to terms versus being on a payment plan or being whatever you know, is we were talking about that that’s just an example of something that just popped in my mind. But is it you know, I don’t know if you’ve ever experienced that or not, but it happened.


Craig Jeffery  14:07

I haven’t had to go to the hospital. So but I mean, you told me about your Twix removal surgery, so I can understand how they want to get paid, paid soon.


Jason Campbell  14:19

Yeah, yeah. But it makes sense. You know, it totally, it totally makes sense. It’s always good. You know, I think that the you know, being incentivized and I think dangling a carrot where you can best benefit and you know, based off you know, like, again, you want your department or organization or however whatever the goals are. So we talked about a little bit about the promise misunderstanding. So again, let’s flip the script here and look at it when when do ar and Treasury groups need to really come together and find a way to have peace and harmony?


Craig Jeffery  14:45

I think it’s pretty easy for either group to make the others life very miserable across the board. So you know, the Treasury is going to care about their banking relationships, primarily to make sure that they have credit access to credit, AR as a group as well as sales is going to care about the client relationship and experience because that will help them sell more. And I think understanding those two, those two areas, they need to work together because you have to go to feed your banks that provide credit ideas, long term relationship, and you have to support your, your customers, your clients, those, those two things have to be done together. So that’s a, that’s a working together. You know, even though one is more oriented towards one than the other, both of those are important to the organization. And that that ties into the working capital management, I’ll talk about that all the time. Your cash conversions, like how efficient it is, but actually not not having too much tied up in receivables is one key. Or if we’re talking about receivables, we’re talking about sales, there’s a whole nother thing about sales and treasury, which I guess that’ll be another one of our art talks about the different languages. But the other piece too, is they need to work together on the process. And that includes all the way through to reconciliation, you know, they apply auto with, you know, assign auto apply functions that help AR move to the process where they’re only dealing with the more thorny issues is, is great because they have to be efficient. And so you have to have the right types of services that allow AR to scale and handle differences and volumes, right? Work doesn’t come in to AR on a consistent basis throughout the month and vary. In almost every organization, it’s it’s got peaks, it’s got middle of the month and the month, double barbells, whatever they have, they have uneven workload. And they have to, they have to post and manage this activity. To the extent that Treasury can help bring services and functions to them. Their ability to work together allows for a far more scalable accounts receivable group, that means a far more even flow of cash to be able to support it. And efficiency is a key driver for all for all of them because the organization has to be able to scale properly. Those are some of the key areas.


Jason Campbell  17:06

Well, I think it’s anything I mean, organization wise, even though it may look like cousins, right? You got to find ways to make it work and showing up at the family reunion and all that good stuff to play dice and to find ways to work together and you know, and share some of those commonalities, and ultimately, having the objectives met at the end. Well, Greg, thank you again for joining me today really do appreciate it on this episode of becoming a treasurer talking about accounts receivable. And thank you to our listeners for tuning in to this episode really helped again, there were some great insights and key to it, you know, key things that maybe you’re able to take away and be able to advance your next career step. So until next time, take care.


Announcer  17:53

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