Balance Sheet and Cash Planning
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      Accounts Receivable Tips & Tricks

      Planning for and analyzing Accounts Receivable.

      Accounts receivable on the Balance Sheet represents the money your customers owe you for goods or services they have purchased from you.

      For example, let's say I have a company that sells pies, the Pie Company, and I sell 50 of my pot pies to a grocery store, Checker Grocery, at $10 each for at total sale of $500. When I send Checker Grocery an invoice for $500, the accounts receivable balance for The Pie Company will increase by $500. When Checker Grocery subsequently pays the invoice, the accounts receivable balance for The Pie Company will go down by $500 and cash will increase by $500. 

      The effect of an invoice not being paid in the same month the sale is made has a critical impact on cash. As such, it is very important that Accounts Receivable is analyzed and planned for. The following are common methods used to understand and plan your Accounts Receivable balance.  

      Understanding Accounts Receivable

      Accounts Receivable Turnover Ratio

        The AR Turnover Ratio tells us how efficiently our company is collecting revenue by calculating the number of times AR is collected over a given period.  For example, let's look at a month with  $15,000 in net sales and our AR balance is $6,000 at the beginning of the month $9,000 at the end of the month. Our Accounts Receivable Turnover Ratio would be 2 ($15,000/($6,000+$9,000)/2)).  

        Typically a higher AR Turnover Ratio means that your company is effectively collecting revenue whereas a lower AR Turnover Ratio means that your collection policies may be ineffective. This ratio can also be used to forecast Accounts Receivable in plan periods. 

        To calculate your AR Turnover ratio, follow these steps:

        1. Create a new line in a Custom Table for Accounts Receivable Turnover Ratio.

          Optionally include reference lines for Net Credit Sales & Accounts Receivable GL accounts.

          Net Credit Sales are typically calculated as total revenue less discounts, returns & allowances. In this example, total Revenue represents Net Credit Sales. 

        2. Add a driver to calculate the Accounts Receivable Turnover Ratio.

          The driver should divide Net Credit Sales by the monthly average Accounts Receivable Balance.

          To calculate the monthly average, we want to use the beginning balance + the ending balance divided by 2. This achieved by referencing the prior month ending balance + the current month ending balance of the GL account Accounts Receivable. Note, the Range for the Driver will need to be added as a custom range and the Reduction should be set to Avg.

          Update the Start Date to Min Date and the End Date to Cutover Date to only calculate for Actuals periods. 



        Days Sales Outstanding (DSO)

        DSO tells us the average number of days it takes for us to collect on an invoice after a sales is made.  For example let's look at a month with 30 days where we had $3,000 in sales and our AR balance is $6,000. Our Average Daily Sales would be $100 ($3,000/30) and our DSO would be 60 ($6,000/$100).

        To calculate your DSO, follow these steps:

        1. Create new lines in a Custom Table for Number of Days in the Month, DSO & Average Daily Sales.

          Optionally include reference lines for the Sales & Accounts Receivable GL accounts. 

        2. Populate Days in Month for Actuals & Plan periods.

          Calendar days in month or business days in month can be used. 

        3. Add a driver to calculate Average Daily Sales.

          The driver should divide Average Daily Sales by Days in Month.

          Update the Start Date to Min Date so that the Driver calculates for Actuals & Plan periods.

          If sales fluctuate month to month, a rolling two or three month average can be used by adjusting the Range on the Driver & Rate references in the Driver calculation.

        4. Add a driver to calculate DSO.

          The driver should divide Accounts Receivable by Average Daily Sales.

        Planning for Accounts Receivable

        Method 1: Net 0, 30 or 60 Day Receivable 


        With this method we assume that the current month sales will be collected the same month (0 days), next month (30 days) or 2 months from the sale (60 days).

        This is the default method available for planning Accounts Receivable in Jirav. To configure which account should be used to project AR and whether you would like to to apply a 0, 30 or 60 day collection, go to Setup⚙️ > Company.

        Method 2: Days Sales Outstanding (DSO)

        DSO can also be used as a method to forecast the future AR balance. Actual DSO can be calculated as described above and then used as a reference point when forecasting accounts receivable for the planned period.

        To calculate AR using the DSO method in Jirav, follow the steps below. Note, these steps assume DSO has already been calculated as described above. 

        1. Add a Driver Increase for Accounts Receivable.

          This driver should multiply Average Daily Sales * DSO from the Custom Table.
          The range for DSO from the Custom Table should reference a prior period as to not be circular. For example, you might choose to reference actual DSO from the prior month or a trailing 3 month average. 
          Set the Output to Driver Increase. 

        2. Add a Driver Decrease for Accounts Receivable.

          Because the DSO method plans for the AR ending balance rather than the net change, a driver should be added to decrease AR by the prior month balance.

          Set the Output to Driver Decrease and the Driver to Subtotal AR from the prior month.

        3. Verify AR is calculating as expected.
          This can be done by reviewing the Custom Table if reference lines were used, or by going to the Assets section of planning or by viewing a Balance Sheet report.