Keep ‘Em Current!

A major cause of business failure is poor cash flow.  Although poor cash flow may be caused by both cash inflow and/or outflow issues, surprises in cash inflow are generally tougher to anticipate and manage.  Surprises and difficulties in cash inflow generally relate to an inability to collect an amount due from a customer (I.E., bad debt) or collecting slower than anticipated due to bad business mechanics and poor or non-existent credit and collection policies.

Bad debt write-offs are poisonous.  Your accounts receivable, credit and collection, and sales processes need to be smartly designed, monitored, and aggressively managed.

First, know if you have a problem.  How long does it take on average to collect your receivables?  How does that compare with your historical performance?  What is the trend?  How does that compare to your competitors?

How do you manage and reward your sales force?  It shouldn’t be strictly sales volume, but should also incorporate gross margin (profitability) and cash collection measures.  Many companies have gone out of business with rising sales but insufficient cash due to sales that were unprofitable or weren’t collectible.

Do you have a written credit and collection policy that articulates your risk posture regarding how aggressive you will be in granting customer credit and under what terms and conditions?  Have you established credit files for large exposures and do you review your credit lines regularly? 

How are your business mechanics?  Do you make it easy for your customers to pay you? Do you promptly invoice and do you follow up quickly for payments not paid within terms? Little things like including a phone number or email address on your invoice encourage customers to communicate questions or problems.  Doing the little things right makes a bigger difference than you might think.   

The key to effective accounts receivable management is to keep them current.  Have you defined your escalation procedures? When payments are missed or payment promises broken what happens next?  How does your staff communicate A/R problems?  Do you receive good reporting so you can spot developing problems before they become calamities? Companies in financial trouble will generally slow pay those that allow them to slow pay.

Sales without cash collection are worse than no sales at all.  For every dollar of accounts receivable you cannot collect, it takes a multiple in sales to cover the loss!  Don’t sell to people who won’t or can’t pay, give those customers to your competitors!