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Sunday, June 27, 2010

EVA - Increase with AR Reduction

Economic Value Added (EVA) is a financial performance method to calculate the true economic profit of a corporation.  The capital employed will increase the charge against profit and lower expectations.  One driver of capital charge is the asset of Accounts Receivable (AR). 

Four strategies to lower accounts receivable are as follows:
  1. Upfront Sales Terms and Conditions - a key factor in affecting the receivable balance is to make up front contracts to sales terms and conditions clearly understood.  Have a standard policy/procedure and while leaving room for flexibility of negotiation, ensure clarity with the customer.
  2. Finance Team Cross Functional - ensure the finance team is highly involved in the operations and understands the barriers to efficient receipt of cash.  A margin of the time a breakdown occurred in operation to slow down payment.
  3. Deliver customer requirements on-time - once we have committed to a contract it is key that all deliverables are on time.  The delay on the firm's delivery will be reciprocated with payment timing.
  4. Quality Product - a key to ensuring efficient collection of cash is the quality of the product.  A poor quality will significantly delay payment and may put a customer at risk.
As Arthur Levitt states, “I worry the best execution may be compromised by payment for order flow, internalization, and certain other practices that can present conflicts between the interests of brokers and their customers.”  The internal workings of a corporation can be challenging to the payment process.