Question

Baird Company has noted that they have increased sales by 75% in the past two quarters and the sales manager is looking at the end of the year and anticipating a huge bonus because the sales figures are up. The operations manager is looking at the accounts receivable aging report and sees that the company's average collection period on accounts receivable as gone from 14 days to 48 days. What do you think can be the cause of this change and how would you (as operations manager) discuss the anticipated bonus with the sales manager?

Answer 1

The increase in sales and increase in average collection period on accounts receivable indicate that much of the sales target has been achieved by making credit sales during the period. Credit sales increase the sales for the period but it increases the average collection period. Average collection period is the collection period involved in collection of receivables due from the credit customers. A higher average collection period is not recommended since it will lead to working capital requirement and involve financing cost for the firm.

As an operations managers during the appraisal and bonus discussion this material fact of increase of average collection period should be brought to the notice of sales manager and he should be made aware of the implications of the same. The increase in credit sales can lead to bad debts if the customers are unable to pay the dues on time. Hence operations manager should highlight to sales manager achieving target through credit sales for the purpose of bonus is not a right way of achieving target.

The sales manager target should be include average collection period also as one of the key performance indicator so that credit sales are controlled.