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I. CASH MANAGEMENT SERIES - Managing Your Accounts Receivable

Authored By: Jim O'Donnell
Managing cash is one of the most critical elements to having a profitable business. Without proper understanding of the "Cash Cycle", many businesses find themselves cash constrained, thus limiting management's ability to conduct day-to-day operations as well as make long term investments to ensure the viability of the business. A series of three articles examining important areas of cash management will be discussed starting with this issue of the newsletter and continuing in the next two newsletters. The three critical areas of Cash Management to be explored are: Managing Your Accounts Receivable, Effective Purchasing Strategies, and Smart Financial Tactics. Each article offers many Cash Management suggestions for helping to evolve the business to a higher level of growth and profitability.

The first Savvy Strategies for Cash Management article is entitled: Managing Your Accounts Receivable. Tightly controlling this process will help eliminate the "cash crunch" many businesses find themselves in when A/R policies are lax.

I. Managing Your Accounts Receivable

1. Discuss payment terms during the sales process: It is simply amazing how infrequently this happens. Sales reps or business owners generally don't like to discuss payment terms as it is often viewed as a "negative" during the sales process. However, setting the right expectations early in the sales cycle saves everyone a lot of problems later on and also establishes credibility for your company because the client knows you are serious about collecting what is justifiably owed to you.

2. Have the customer submit a credit application: This is one of the activities that many small or medium size businesses fail to execute. Many decisions regarding who to accept as a client are resolved instantly with a credit report.

3. Offer a discount for early payment: There are pluses and minuses with this tactic. It is assumed that with this tactic cash flow would generally be more rapid, but this isn't always true. If you offer an early payment discount to a client who always pays invoices on time, then you have unnecessarily given away part of your profit. Many large companies have a standing policy whereby they take every discount available because they understand the value that is being offered. Other companies will take the discount even though they have not complied with the terms. This makes enforcement very difficult and trying to collect the discount can be more costly than the actual value of the discount. Offering an early payment discount to a "slow" payer may be just the incentive that is needed to collect payments on time. Analyze your client's payment history and selectively apply this strategy for maximum benefit.

4. Charge interest on overdue accounts: This may help to receive payments on time as companies don't like to be penalized or pay more for a product or service than is necessary. This element of the payment terms should also be discussed early in the sales cycle. Although charging interest on a past due account is a fairly standard practice in most industries, as with early payment discounts it can be costly to collect if the customer does not pay the interest. However, assessing the late fees on a subsequent invoice can serve as a motivator for the customer to pay the original invoice (oftentimes less the interest) which is far more important than collecting late fees.

5. Send invoices promptly and with a specified due date: Don't wait until the end of a month or a fixed date to send invoices - send them immediately. If you ship a product at the beginning of a month and wait until the end of the month to send an invoice with thirty (30) day terms, then the payment cycle is sixty (60) days. If the invoice is sent immediately, then the cycle is thirty (30) days. A long payment cycle can cripple the company cash wise. Always include a Due Date on every invoice.

6. Require pre-payment for custom or large orders as well as long term projects: Custom work requires extra steps in a process which adds to the cost, and, as it implies, is customized for a specific use or for a specific customer. This generally means the finished product doesn't have much value for any of your other customers. Therefore, a large pre-payment is justified to cover your extra labor and material costs as well as your risk if the customer suddenly cancels the order. Long term projects require periodic progress payments from the customer that match the company's spending cycles to ensure that the company does not have a "cash crunch".

7. Don't hesitate to ask the customer to pay: Many employees, managers, or business owners are afraid to ask the customer for payment in the fear they may upset the customer or make it appear their company is desperate for cash. The longer you wait, the harder it becomes, and the higher the probability that you won't be able to collect that which is due you. If the terms are thirty (30) days and an invoice is not paid, immediately send another invoice stating "PAST DUE - IMMEDIATE PAYMENT REQUIRED". If this doesn't elicit a response within ten (10) days, then start calling the client for payment.

8. Personalize the collection process: Many employees, managers, and business owners are especially fearful of making telephone calls to collect Past Due funds. However, I will strongly suggest that you can usually collect your funds quicker this way than with numerous letters and invoices that are stamped "PAST DUE". Never get angry, make a friend within your customer's Accounts Payable department, and use guilt to your advantage - they already know they are late and that you are owed the money. If your client is financially unable to pay the full amount, then try to receive a partial payment along with a schedule for when you will receive subsequent payments.

9. Tell the truth - "I can't afford 60 to 90 days": If you are a small or medium size business, you really can't afford 60 or 90 day payment cycles, and larger businesses understand this. If your client values your services, then they will usually pay in a timely manner.

10. Don't do any more business with someone that doesn't pay: This sounds so obvious, but far too frequently a business that desperately wants to keep a "good" client will continue to ship additional products on the promise of a payment which never materializes. Set limits on how much product you are willing to ship, and don't ship more products than this limit allows until payment is received.

11. Factor your Accounts Receivable: Factoring is the sale of accounts receivable invoices to a funding source (factor) at a discount off the face value in return for immediate cash. Money is only disbursed after the transaction is complete. Each of the accounts offered to the factor for sale must reflect an accurate statement of a final sale, delivery, and acceptance of goods or services performed. The process typically works likes this: The business delivers a product or service and issues an invoice to the customer. Without factoring, the business normally waits 30, 60 or 90 days for payment. With factoring, the factor immediately purchases the invoice and advances an initial payment of 70 to 80 percent of the invoice amount. In most cases, the business will have the funds in their account within 24 hours. When the customer pays the invoice, their payment is made directly to the factor. The business then receives the remaining balance (20 to 30 percent of the invoice amount) less the factor's fee. With factoring, it is important to note that it is the credit worthiness of the client company that is important, and not your businesses credit worthiness. A future issue of this newsletter will discuss factoring in more depth.

12. Delay paying sales commissions until the customer pays you first: This strategy will help make the sales rep take an active interest in collecting receivables. It now becomes important for the sales rep to discuss payment terms during the sales cycle.

13. Don't take an order you can't make a profit on: This is a hard principle to adhere to when you are trying to close a new account. Once you have established a "low" price, it is very difficult to raise prices later on. Also, customers "brag" about the deal they got from you, and now everybody expects the same deal. It is extremely difficult to sustain a business with low margins.

14. Offer volume discounts judiciously: If you plan on offering volume discounts, base them only on orders actually received, not on the "promise" of future volumes. Some companies will request a price asserting they will be buying large quantities of your product over a long period. After the volume discount price is established, only a few items at this low price will be purchased. Establish a discount schedule that defines a specific discount for a specific quantity purchased. Applly larger discounts when, and only when, larger quantities are purchased.

15. Don't ship more product than you can afford to lose: One of my clients was having a lot of difficulty collecting payments from a customer that was having financial difficulty. My client, based on my advice, was to only accept COD terms from his customer. Late one Friday afternoon I happened to be in my client's area and I stopped in for a visit. Thirty six boxes of product valued at over $10,000 were ready to be shipped. However, his customer had requested the COD label be placed on only one of the 36 boxes to save time, expense, etc. This would have been a financial disaster for my client. His customer was planning on accepting the 35 boxes without the COD label and rejecting the one box with the COD label. Always be wary of customers who are slow payers or who are trying to find a way around "the system". No business will survive with customers such as this.

Apply the Savvy Strategies of "Managing Your Accounts Receivable" to free up the cash for rapidly growing your business!


Take the Next Step! Where your business has been, or is today, is no longer important. What matters MOST is what comes NEXT! Take the next step on the road to growth and profitability by contacting us via (603) 642-8338 or email Jim O'Donnell for a No-Cost, No-Obligation conversation to discuss your company's opportunities.



 

 

 
 
 
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