You notice that your accounts receivable days outstanding has doubled in the first 6 months. Do you give someone a bonus or put him or her on probation? Why?
Determining whether to give someone a bonus or put them on probation for an increase in accounts receivable days outstanding requires a comprehensive analysis and evaluation of multiple factors. Here is a step-by-step explanation of how you can approach this decision:
1. Understand the metric: Accounts Receivable Days Outstanding is a measure of the average number of days it takes for a company to collect payment from its customers after a sale is made. It reflects the efficiency of the company's credit policies, collections process, and customer payment behavior.
2. Gather data and context: Obtain data on the accounts receivable days outstanding for previous periods to establish a baseline and compare it to the current situation. Consider industry benchmarks to determine if the increase is significant or within an acceptable range.
3. Identify the cause: Investigate the factors contributing to the increase. Potential causes might include changes in customer behavior, economic conditions, internal process inefficiencies, or ineffective credit and collections management.
4. Analyze individual performance: Assess the specific employee's role and responsibilities related to accounts receivable. Determine their level of influence over the metric. This could involve reviewing their performance metrics, workload, customer interactions, and adherence to established credit and collections policies.
5. Evaluate other factors: Consider additional factors beyond the individual's control that might influence accounts receivable days outstanding. For example, changes in the company's credit terms, customer mix, or economic conditions could impact the metric.
6. Mitigate individual accountability: If it is determined that the increase in accounts receivable days outstanding is primarily due to the individual's actions or inactions, evaluate the severity and longevity of the issue. Determine if it was a result of negligence, inadequate skills, or lack of effort, or if it was a temporary issue that is being resolved.
7. Address performance concerns: If the individual's performance is a significant contributing factor to the increase and their actions are not aligned with the company's expectations, consider appropriate actions such as training, coaching, or performance improvement plans. Probation may be appropriate if there is a substantial performance issue or repeated negligence.
8. Assess the broader context: Examine the overall company performance and the individual's contributions in other areas. If they excel in other aspects of their role or demonstrate potential for growth, take those factors into account.
9. Consider external factors: Look at the market conditions, customer behavior, and economic factors that might have impacted the increase in accounts receivable days outstanding. Determine if these external factors played a significant role that should be taken into consideration.
10. Communicate expectations and provide support: Clearly communicate expectations for improvement, set specific goals, and provide necessary resources and support to help the individual address the issue. Monitor progress closely and provide constructive feedback.
11. Continuously assess and adjust: Regularly review the situation and monitor the individual's progress. If they show improvement and take corrective actions to address the issue, consider providing positive reinforcement or rewarding their efforts. On the other hand, if the issue persists or worsens, additional corrective measures may be necessary, including probation or other disciplinary actions.
Ultimately, the decision to give a bonus or put an individual on probation should be based on a thorough evaluation of their performance, accountability, and their ability to address the issue responsibly and effectively.