Question

You are consulting with the manager of an Accounts Receivable department of a large manufacturing company. The manager is concerned that some of the customer accounts are not being paid promptly under the current payment terms. The current payment terms specify 14 days for receipt of payment of all bills. Since the manager did not have any hard evidence, you suggested that the manager collect some data that could then be analyzed.

Based on your advice, the manager collects a stratified random sample over a typical 2-month period (a random sample of each week’s records for each day the company was open for business, including Saturday).

Conduct the appropriate analysis and present your findings and conclusions as well as your recommendations to the Accounts Receivable manager below.

Week 1

14 13 11 14 13 19

Week 2

12 18 13 16 15 17

Week 3

15 16 18 16 13 26

Week 4

27 25 23 26 23

Week 5

21 12 14 15 13 11

Week 6

14 19 19 18 14 19

Week 7

18 22 20 23 24 22

Week 8

28 26 25 27 29

Answer 1

Firstly for making an analysis of the above data, lets take an average of the 8 Weeks individually:

Week 1 = 14+13+11+14+13+19/6 = 14 days

Week 2 = 12+18+13+16+15+17/6 = 15.17 days

Week 3 = 15+16+18+16+13+26/6= 17.33 days

Week 4 = 27+25+23+26+23/5 = 24.8 days

Similarly, Week 5 = 14.33 days, Week 6 = 17.17 days, Week 7 = 21.6 days and Week 8 = 24 days.

Therefore, a major observation or analysis from the above trend, will be, that the first week has the earliest collection time and the weeks go by, the average collection time increases, the highest being the last week of the month. Thus, it is the least in the First Week of the month and the highest in the last week of the month. This means that the customers are quicker to pay in the initial week and later in the coming weeks.

The recommendation to the Accounts Receivable Manager in this case, would be to focus on the customers paying in Week 3 and Week 4 of a month. These are the major defaulter customers. The Manager should double his efforts and ask them to make the payment within the 14 days of time

Also, the recommendation for the Accounts Receivable Manager to receive the payments within 14 days would be to introduce a discount, wherein the customer who pays within 14 days of the billing, will receive a discount of 1% of the total bill amount (or any other percentage found appropriate by the manager)