The Three Bucket Theory --Dickeson
Okay. What are the invoicing constraints? What's keeping us from cutting the invoice in the same procedure as the packing slip? Is it because the controller insists on seeing the completed job cost file before preparing the invoice? Completing that job cost file requires being sure that invoices from outside vendors are in and tally with the estimates, purchase orders and receiving slips, doesn't it? It requires that every AA be in the file and listed. A dear friend in printing said that he'd struggled a lifetime trying to accelerate invoices and he'd succeeded in reducing the lag to 14 business days!
I'm saying that Fig lag is an UNACCEPTABLE constraint on cash flow. If you measure and report the Fig weekly it will eventually go away due to the nausea of seeing useless cash waste every Monday morning. But, your A/R inventory may increase if you don't accelerate your collection process!
We haven't said anything about raw materials inventory. Most of us think that's what Just In Time is about. That's only partly right. We want to keep our DMOH for raw down by receiving materials as near scheduled production time as possible. But we put in some safety buffers for raw materials that are too extended. Like wearing both a belt and suspenders to hold up our Dockers. There's both a global and local view of Raw DMOH. The local drill down is by lot and type. How many days or hours has that lot been on hand?
Accounts Receivable inventory? Yes, it's an inventory of claims and is the fourth hurdle between cash out and cash in. Compute DSOH (Days Sales On Hand) by dividing the receivables balance by the week's sales. Multiply by seven for a week.
What can I say about A/R that hasn't been said—ad nauseum. It's global and local DSOH analysis once again. Measure and manage. Collection lag can kill—it has and it does.