In talking to several business owners this week, I realize the have something or even much in common. Four of them have collection issues and as a result poor cash flow; the other two have a healthy A/R process and their clients actually qualified for a receivables factoring line of credit.
What is the common denominator?
All six businesses have well prepared personnel, experienced and highly professional, first class equipment and installations, earned prestige through years in business, operational processes in traffic and logistics, apparently they also have excellent customer service, along with good direction and administration focused in growth.
In reviewing their reports on receivable statements showing aging of accounts and the differences in balances, I inquired about their credit and collection policies and procedures. What do you know? I had just found the common denominator among these businesses: Credit and collection policy and procedures.
The two businesses with healthy A/R process make sure there is a good measure of consistency in their credit and collections when structuring their strategies to administer their A/R accounts through their credit and collections policy and procedures. The other four with collection issues simply do not have credit and collection policy and procedures in place. This results in past due balances between 31 and 220 days old.
One of the business executives mentioned to me: “I believe some of my customers do not pay on time because sometimes my A/R department does not contact them in a consistent or programed fashion.” You can be sure some of your delinquent customers are paying some of their suppliers on time – those who actually collect in a systematic and professional fashion.
If you believe that establishing credit and collection policy and procedures is a waste of your time, I suggest you think of your account receivables as transportation equipment. Both are assets destined to generate income.
Example: If you have a truck standing still for 30 days in a city just waiting for cargo, I am sure you would be concerned to just have it sitting there. You would press your traffic, sales and customer service departments to book a load, promote your services to your industry contacts, whether freight or custom brokers.
I would venture to say that you would even sell your service on a cheaper rate, including losing money on that load; just as long as you could get that truck moving by servicing other clients to generate a profit.
Think of that account that is already 60 days past due, or earlier if there is a denial of debt and lack of payment, and you are still treating this account just as the rest. Just waiting and waiting until they pay. A solution could be to assign this account to a collections agency specializing in your industry.
Just as the first example, your company generates an expense to recover the account when paying collection fees, but at least you will be able to utilize cash flow you receive.
Don’t you think it is better to have $80,000 tucked in your pocket than $100,000 pending collection?
Although I had previously discussed the importance of having credit and collection policy and procedures in place, I believe it is of outmost importance to stress the fact that those business owners and executives that follow through with their credit and collection policy and procedures are the ones who have higher probability of success and improve their cash flow.
Trust me, having objectives and established procedures will allow you to focus in securing more reliable customers and a healthier cash flow. You will also get rid of the stress associated with a disorderly process.
I hope my advice is of assistance to you.
See you next time!