Unless you’ve been sound asleep for the last several months, you know that the global economy is in a serious crisis. And it’s not just the brokerage houses and financial institutions that are in trouble. Businesses around the world are facing formidable challenges in a struggle to survive.
Most companies are not going to get multi-million dollar government bailouts. It’s up to each company to make the tough decisions, chart its own course, and take a hard look at what it needs to do to survive. Getting serious about efficiency and effectiveness in handling receivable management needs to be a focus.
According to the Association of Executives in Finance, Credit & International Business (FCIB): “As global markets tumble and bank lending freezes, the role of trade credit as the main source of cash has become even more prominent.”
The Credit Research Foundation, in a recent publication – Lessons for Business to Learn from Today’s Credit Crisis – makes corporate priorities clear: “Your organization’s mission at this point should be to abandon the thrust to increase revenues and garner market share in favor of increasing cash flows and profitability.”
Credit and receivables have stepped to center stage. And it’s time to get serious about improving management of this increasingly valuable asset.
Key #1 -Effective Credit and Collection Policy
Effective credit management is about developing consistency in your credit and collection processes. This, in turn, will ensure efficiency in your entire revenue cycle.
The secret to consistency is a thoughtfully designed and actively implemented credit and collection policy. Such a policy has power to breathe new life into your entire credit-to-cash process. Even if you already have a credit and collection policy, it’s important to review it on a regular basis to assess its effectiveness and to make sure you are following it.
The CRF (Credit Research Foundation) web site’s Credit Assistant is one of the best resources available on the particulars of credit management. Click on “Credit Assistant” on the CRF home page (www.crfonline.org) and you will find a wealth of information on just about every aspect of credit management.
For help in developing your credit policy, select “Organization and Administration” from the left-hand navigation on the Credit Assistant home page. Then click on Developing a Credit Policy. This article even includes a credit policy worksheet to help you develop your own policy.
Key #2 – Due Diligence
As lines of credit dry up, your customers are going to start looking to trade credit as a source of working capital. Current customers may ask you to extend your terms or stretch out their payments. New customers may request very liberal open account terms.
But beware – now is not the time for short-cuts in credit decision-making. Treat every credit sale as if it could become a potential collection issue.
With current customers, don’t assume they’re okay now because they were okay last year. Review the creditworthiness of all of your important customers. Today’s business climate is erratic, to say the least. Companies that appeared secure six months ago may now be on the verge of collapse. Set up regular reviews to monitor each customer’s creditworthiness to keep a step ahead of bad debt write-offs. In particular, credit applications, financials and participation in industry credit groups can help you develop the information necessary to making a reasonable decision about extending credit to both new and existing customers.
If you don’t normally use credit applications, start using them now. If properly constructed and executed, the credit application serves as an information-gathering tool that can also function as an enforceable document if litigation becomes necessary.
Consider this. When you go to your banker for a loan, you expect him to require financial information. When a potential buyer asks you for credit terms, the extension of credit is no less a loan than that given by your bank. Yes, financials are often difficult to obtain. But an analysis of financials is critical to determining whether a customer is worth the risk of an unsecured credit facility.
Again, the “Credit Assistant” section of the Credit Research Foundation provides valuable information on Financial Statement Analysis. Click on the Customer Financial Assessment section (Task Index) to find a series of topics on Customer & Financial Statement Analysis.
Industry Credit Groups
Credit managers routinely use credit bureau reports as a source of data for determining the creditworthiness of a customer. These reports may include general and dated information on a company’s financial position and credit history from various unidentified sources. In recent years, commercial credit reporting agencies have enhanced their offerings with items such as credit scoring, on-line access, and links to websites containing public record information.
These one-size-fits-all credit information solutions fall short, however, when it comes to providing the industry-specific information credit managers need to round out a customer’s financial profile and payment history.
Recognizing the limitations of traditional generic trade reports, credit professionals are discovering that membership in industry credit groups fills the gaps, helping them develop more complete credit histories on both new and returning customers. The net result is a faster, more accurate, cost effective solution for managing the risks associated with extending credit.
Key #3 – Protect Your Sale Wherever and However Possible
There are a number of ways to protect your sale when selling domestically or internationally.
The place to start is at the beginning. By appropriately structuring your sales contract (and/or credit application), you can build future protection in case you need to litigate. A well-written contract can make the litigation process easier and faster, and the likelihood of success much higher.
The Bernstein Law Firm outlines three things you can do to Improve Your Chances of Collecting from a Risky [Any] Customer:
(1) get written personal guaranties of payment from your customer’s principals;
(2) retain a security interest in various assets; and
(3) include a confession of judgment clause as part of your sales agreement or credit application.
Certain sales instruments also offer extra security when selling on credit. Including:
- Letters of Credit – see CRF Credit Assistant (Collateralization / Securitization)
- Bills of exchange (D/P and D/A Transactions)
Also consider factoring (CRF Credit Assistant – Collateralization / Securitization) or trade credit insurance, and, of course, perfecting a security interest in your customer’s assets.
Key #4 – Focus on Cash Flow
Businesses today cannot afford excessive write-offs or large numbers of delinquent accounts. Few business owners will dispute the fact that cash is king. A lack of operating cash was the primary “cause of death” for many U.S. “dot-coms” in the early 2000s. Poor cash flow management continues to result in the collapse of business enterprises, large and small, worldwide.
One of the most common cash traps is uncollected sales, a.k.a. accounts receivable.
How can you improve your cash flow? By reducing your Days Sales Outstanding (DSO). And how can you reduce DSO? By training your customers to pay on time – and that requires constant attention and follow-up. With receivables, it’s really “the squeaky wheel that gets the grease”. You want to be at the top of your customers’ payment list. How do you get there? Either by providing the most essential product or service; the one your customer can’t stay in business without. Or, by regular follow-up that keeps you in front of your customer on a consistent basis.
In Methods for Improving Collections, another CRF Credit Assistant article, the CRF recommends “Systematic follow-up of [all] accounts”, which “reinforces the serious nature of the outstanding debt and emphasizes the importance attached to it by the creditor [you].” Also, “it is important [essential] to keep contacts on a strict schedule.” The CRF encourages every credit department to set up a matrix of delinquent customer contacts, which might start shortly after the invoice becomes delinquent.
We recommend you consider following up even before the invoice becomes due. A letter or call letting the customer know the product has been shipped, when it should be received, whom to contact if there are any questions or issues, and when payment will be expected goes a long way toward a happy client and on-time payments.
Key #5 – Know When to Call in Outside Assistance
No one can do it alone. Many credit professionals struggle under the weight of increased scrutiny, expanded responsibilities, and static resources. Bogged down with daily operations and growing responsibilities, how can you make the changes necessary to improve overall business performance?
One way is to outsource 1st or 3rd party collections.
First-party Collection Outsourcing
First-party collection outsourcing is nothing to be afraid of. Most credit departments today cannot afford to hire all the staff they require to touch all of their credit or delinquent accounts.
The organizational benefits of outsourcing are well documented. A recent survey by The Hackett Group noted that “World-class companies spend a higher percentage of time on strategic vs. transactional activities. World-class companies outsource 66.6% more than non-world class firms.”
By providing a consistent, efficient, technologically current process, outsourcing A/R collections offers opportunities to address the immediate challenges facing credit managers. At the same time, the systemic improvements that come with outsourcing create benefits that will help the credit department achieve its broader goals.
For those not yet ready for a total outsourcing commitment, a partial outsourcing solution offers a low-risk entry into outsourcing’s benefits. By outsourcing only a selected portion of its A/R function, the organization can determine if it: (1) is comfortable with outsourcing in general; (2) has selected a provider with the right capabilities; and, (3) has the internal capabilities to successfully manage an outsourcing project.
Among companies that should definitely consider partial outsourcing are those that: require a few more receivable collection FTEs (full-time equivalents); have occasional need for increased staffing; or, feel their internal processes are ineffective and would like to benchmark them against a professional receivable management firm.
Even with the best credit management procedures and great care in approving credit customers, some accounts are going to go past due. And most companies, at some point, need the services of a professional collection agency.
If your buyer hasn’t paid in 90 or more days, you shouldn’t hang onto the account any longer.
Professional commercial collection agencies have the clout and local contacts to convince your debtor you’re serious about collecting your money. They can also help with legal action and most have networks of attorneys that can sue in any jurisdiction.
Another advantage: most collection agencies work on a no pay/no fee (contingent) basis. So, in essence, you have nothing to lose by placing an account with them. If they can’t collect it, you don’t have to pay them.
Focus Your Efforts on Effective Credit Management
Your company didn’t cause the current credit crisis – but it’s going to be up you to ensure your business survives it.
- An effective credit and collection policy
- Due diligence
- Protecting your sales
- Focusing on cash flow
- Seeking outside assistance
These 5 Keys to Effective Credit Management provide a valuable check-list to help you focus your efforts.