MEASURING OUTSTANDING REVENUE AS WEEKS BILLING OUTSTANDING
By SACHIN GHOGLE
Introduction Financial management focuses in finding the value in accounts receivable by emphasizing on improving the collections process and hence accelerating the cash flow. ‘Revenue Outstanding’ is the amount due from the customer as a result of an organisation’s normal business operation, that is, it is the amount that has been billed by organisations and is due, but which has not been collected. The management of ‘Revenue Outstanding’ is an important source of cash and hence an important parameter that the management should measure. The estimation of time to recoup the revenue outstanding is important to determine the profit of any organisation. Most prefer to receive payment immediately rather than to wait for it, especially because sometimes payment is never made in the latter scenario. There is no one general technique to estimate the time to recoup the revenue that can be adopted by all the organisations. It varies from organisation to organisation depending on the nature of business and the needs and strategies of the management. Although there is no certainty of receiving payments from all the customers, organisations use various methods to calculate the revenue outstanding or the payment that will be recovered later at a any particular point of time. The Weeks Billing Outstanding (WBO) measure calculates the revenue outstanding based on the total number of week’s billings required to recoup current Revenue Outstanding. The WBO is an important financial parameter, which shows the age in weeks, in an organization's accounts receivable and is defined in terms of the average time taken to convert the outstanding revenue into cash. The WBO measure helps the management to measure the effectiveness of collection activities and alert the management with problem accounts. If the WBO is low, then less time is spent to collect outstanding revenue. By quickly converting the billings into cash, the organisation can reinvest this cash and convert it into profits.
The WBO Measure A payer is responsible to pay for the services used. The total outstanding revenue of a payer is the sum of invoiced amount minus the cash received against some of the invoices minus the unallocated cash/ payments received as advance or prepayment from the payer. Some organisations report the outstanding revenue as being outstanding from the date of the invoice as opposed to the ‘due date’ of the payment. The Weeks Billing Outstanding is the total number of days billings corresponding to the payer required to recoup the current outstanding revenue for the payer divided by number of days in a week. WBO = DBO/7 This WBO is calculated for an individual payer level whereas the management needs the overall WBO for a single business unit or a particular territory. There are three methods to calculate the overall WBO for a single business unit. The overall WBO (Method 1) for a single business unit or a particular territory can then be calculated as the average of the WBO for all the payers within the corresponding business unit or territory. The overall WBO (Method 2) for a single business unit can be more accurately calculated from the business perspective by considering the weighted average of the individual WBO over an important business parameter (for example, the accumulated revenue over the past one year). These two methods can showcase the weak link or the strong link affecting the outstanding revenue. After identifying the weak link, the management can focus on the weak payers to reduce their outstanding revenue and to improve the overall cash flow within the system. The overall WBO (Method 3) can be calculated as the total number of days billings (cumulative for all the payers within the business unit) required to recoup the current total outstanding revenue for the business unit (cumulative for all the payers). Though this method cannot point the weak link, it...
Please join StudyMode to read the full document