Credit management is the same for all sized businesses, right?  Generally this is correct, however small businesses have unique challenges with credit management.  The classic example is that of a small business with a single customer that represents 40% of their annual revenues.  Owners with such a high degree of customer concentration may end of biting their proverbial tongues, sweating it out until a large check comes in the mail.  It does not have to be that way.  By the way, the focus here is on B2B business models; B2C models require collect at or prior to the delivery of the product or service.

Solid credit management is an institutional process, not just a collection activity.   Effective management of receivables (i.e. cash flow) starts with first salesperson contact with customer.  Ideally, the terms of sale or credit terms should always be clearly presented on the marketing brochure or proposal.  Thereafter, every function of the organization needs to consistently integrate these credit terms to the customer, including contracting, production or fulfillment processes, I/T, accounting, and collections functions.

Even with all functions integrating payment terms into customer-facing processes, burgeoning accounts receivable may be indication that the business model is flawed, products are ill-defined, or processes that are part of the product in service businesses are not standardized.   In order words, there is a strategy problem.    An example might be a service business that offers a high degree of customization to their customers, trying to be “all things to all customers.”  Dissatisfaction with the results can impact collections.   The goal is to standardize products or service processes.  The greater the degree of product standardization, the greater the odds that customers will accept payment in advance or at time of service delivery.  For non-standard services, such a consulting (although the consulting process should have standardization), it is reasonable to say ask for 50% upfront, with the remainder due as milestones are completed.   Collection problems may be indicative of a much larger strategic issue.

Effective credit management does not ignore the cost of services component, because both are linked and both impact cash flow.    An example might be a professional services firm that needs to utilize subcontractors on a project.   Owners need to ensure consistency between clients’ credit terms with those that are provided to subcontractors.    Unfortunate circumstances can also occur when a business serves as a subcontractor for another firm on a large project.  The ultimate customer may be a Fortune 500 company with stellar credit that is very satisfied with the project’s results, but what about the firm in the middle that is your “customer.”   I have seen cases where such parties in the middle are under severe financial stress, and stretch out their suppliers.

There are many levels, strategic and tactical, to consider in order to successfully managing credit, accounts receivable, and resultant cash flow.  An experienced CFO can assist in diagnosing the strategic or process roadblocks, improve a company’s cash flow, and get the owner appropriately re-focused maximizing business development efforts.