Acct. Receivable - The Double Edged Sword

By: James Aycock

You have made a product, generated a sale and made a good margin, right? If the sale was made on credit, the story is far from over.
Any sale is an expense that continues until the money is deposited in the bank. The “real� margin of that sale is not realized until that time. For that reason, the accounts receivable department should be a very active, rather than passive, part of the revenue cycle.
As with most things, a effective accounts receivable department starts with a active credit and collection plan. Credit is used to facilitate sales but should not be controlled by the sales team. Upper management should determine what constitutes credit worthiness based on sound cost benefit evaluation. This policy should be sent to the sales group and receivables department in written form. Because any variation of this policy changes the dynamics of the sale; exceptions to the review should be made only rarely and by upper management.
Proper evaluation of potential customers is the next area of importance. While credit reporting agencies are important, the clients trade history is more indicative of what you can expect. Another consideration is how invaluable your product or service is to the customers business and the ease of finding another provider. Based on these and other evaluations, a credit limit and terms should be determined and provided to the customer up front.
Now your client has your products or services and you have a bill. Here is where proper client interaction begins. It is imperative to convey your expectations to your client as soon as their account reaches its first mile stone... their due date. If the client is trying to conserve his cash, he might withhold payment until you contact him. The interaction is much more pleasant at 32 days than at 3 months. If he knows that he will receive a call from you, chances are that he will put someone else on hold. If a payment is promised within a certain time frame, a tickle file should be set up to make sure that the time does not pass unnoticed.
If after all of the massaging the accounts a collection effort ensues, there are some things to remember. It is better to get a tiny amount often than to wait for them to be able to pay the whole amount. They should be able to pay something if they are attempting to make a good faith effort; and every dollar cuts your losses by that much. If the amount involved justifies it, tell the customer that you will have someone come by and pick up the payment if they are local, or have a courier pick it up if not. That puts them up against a hard deadline to write the check. If possible, get the payment plan in the form of a promissory note. This gives the debt a higher position in case of a bankruptcy.
The phrase an ounce of prevention is worth a pound of cure absolutely applies to the accounts receivable department. With the proper realization of the cost of outstanding debts and a dedication to the proper management of the accounts, this department will contribute a great deal to the revenue cycle.

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Author is James B. Acock of Dallas Business Builders - www.DallasBusinessBuilders.com. James is a financial expert in Addison Texas specializing in helping small business owners grow into medium and large corporations.

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