Accounts Receivable Collections

Gene Siciliano

A year or two ago, your business was probably running pretty smoothly, with sales and profits growing. And then the recession and credit crunch hit—a brutal double-whammy—and everything started slowing down almost overnight, including your accounts receivable collections.

Whether commercial or consumer, your customers started paying your accounts receivable later and later, as if they were using your money to fill their own personal credit gap. Well, they probably are.

Most of us don’t realize how dependent we are on credit to run our businesses. Vendor open account credit—the kind you extend to your customers—is by far the largest source of borrowing power in our economy. When you sell your products and services on credit, you are making interest-free loans to your customers, even if you are financing those loans with a bank loan on which you pay interest every month.

When accounts receivable collections roll in on time, it all seems to work out nicely. But when accounts receivable slow down, you still need to replace goods you’ve sold, pay your employees (on time), and pay the rent and all the other expenses of running a business. Assuming your bank credit lines are in place and your margins are adequate, you’ll have a bit higher interest expense but will be able to ride it out with your customers. However, if your credit lines or cash reserves aren’t sufficient to cushion you from the sudden change in cash flow, your business could be in big trouble. Remember that most bad debt write-offs come from old accounts receivable, not current ones. The older the balance, the less chance it will be collected.

Strategies That Work

So your best bet is to encourage your customers to pay accounts receivable on time. “That’s helpful,” you’re probably thinking, “but how do I do that, exactly?” Here are five ideas that may help you improve accounts receivable collections: 

1. Improve your credit-granting practices. On the front end, screen new customers more closely before granting them credit lines. Spend a few dollars actually obtaining a credit report and a few minutes calling a couple of credit references to get a sense of the relationship they have with your potential customer. You might ask about their payment patterns when the economy slows, which could be different from when times are good. A comment that “they sometimes struggle to keep current but they always manage to get caught up” could be a red flag these days. Also, be watchful of a prospect who has changed suppliers more than once in the past year. If you can learn the name of their previous supplier, that’s someone you should talk to.

2. Make a committed collection effort—all the time. At least one person in your company should be responsible for collections follow-up. Don’t make the mistake of giving the job to your controller to handle in her “spare” time. She likely doesn’t have any spare time, and besides, accounting personnel are not typically the best in customer communication, especially if the subject is touchy. Assign the job to someone who is a good negotiator, has an amiable but firm phone personality, and who understands this is a critical job. Most importantly, do what you say you’re going to do. If you promise something in return for prompt payment, make sure you deliver. If you say you must deny future shipments until an account is brought current, stick to it—every time. 

3. Call customers before the payment due date. Have your collections person call the customer’s Accounts Payable department a few days before the payment due date “as a courtesy” to make sure everything is in order and that the check will be going out on time. This little reminder, when positioned with friendliness and a desire to help, can make a friend of the person who actually cuts the check. If your customer is lacking something they need in order to pay you, this would not be a good time to be condescending about their inefficiency. Your effort to quickly provide it could put you at the head of the line for payment.

4. Offer discounts for prompt payment. This is a proven technique that worked well years ago, but has become less common in recent years as business practices evolved. The old ‘2/10 net 30’ was, and still is, a fantastic deal if explained to customers clearly. Consider that a 2 percent discount for paying 20 days earlier than normal amounts to an annual return of 36 percent. That’s not a bad yield for a customer whose savings account is probably earning 2 percent a year or less. Even if your customers planned to pay in 45 days, getting them to pay in 15 days instead represents an annual return of 24 percent. You can juggle the numbers any way that makes sense in your industry, but the key is getting the customer to understand the value they get from paying promptly. And some organizations, like many local governments, are required by their policies to take advantage of such discounts.

5. Create a “Preferred Customer” plan. Want to think out of the box? Consider creating a special program for “special” customers that offers services like free overnight delivery on rush orders, extra discounts, advance notice of price changes, special sales, etc. Promote this as a customer benefit and make it available only under certain conditions, one of which would be consistent payment in accordance with your terms. Don’t make sheer order volume a condition if your low-volume customers produce higher margins, as is often the case. A small invoice that gets paid on time is a blessing compared to a large one that takes 90 days to come in. Make the conditions list beefy enough that it doesn’t look like a poorly disguised collection program. Use it as an opportunity to reward the customers you enjoy doing business with, especially those who pay on time every time.

Meeting Expectations

While you can appreciate your customers’ dilemma in trying to stretch their cash, that’s not the same as agreeing to be their banker—interest free. You can extend their payment terms, as many companies do during times like these, but in the end you still need to collect your money by a date you can plan on. Of course, you also need to avoid alienating your customers in the process. But if you do everything you said you would—provide quality products at competitive prices with prompt delivery—then it’s reasonable to expect your customers to do everything they agreed to, including paying you on time.

But the fact is, most suppliers will get paid late by many of their customers during tough economic times. By follow these suggestions, though, you can be the exception to the norm—and better positioned when the economy turns around again, as it always does.

Gene Siciliano is author of Finance for Non-Financial Managers.
Copyright 2010, author retains ownership. All Rights Reserved.

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