Bad receivables can be a problem for most businesses even at the best of times. In the worst of times, such as those we’re currently experiencing, it can be devastating. Not only is it more difficult to win new business, but it also becomes harder to get customers to pay for products or services already provided. It can be very easy for cash flow to begin to dry up and cause severe working capital shortfalls.
Long before the economic crisis really began to take hold, many large companies were already using their purchasing power to squeeze suppliers through late payments, even though they had plenty of cash in the bank to pay their bills. Now, as the recession has grown, some large companies no longer have the cash reserves available to pay bills on a timely basis. Many CFOs and controllers are taking steps to accelerate payment of company receivables before they become bad. Even if a business has a full order book and its profit forecast looks good, it’s essential that it has cash in the bank to pay bills when they come due. Here are some clues for good receivables management.
Pick your customers carefully.
It’s simple to assume receivables management is all about chasing customers for payment and pursuing the late payers through the courts. But management should start much earlier—before the company even begins the marketing process. For example, many operations derive the majority of profits from a relatively small number of customers, so protecting that profitable core business is the key to surviving during a recession. All late payers need to be critically assessed. Working capital in today’s economic environment is a scarce resource, and the viability of late-paying customers brings into focus the opportunity cost of servicing and selling to more profitable and credit-worthy customers.
Identify those bad payers in your existing customer base, and see if you can determine common characteristics.
Are they businesses of a particular size or who buy a certain product? Begin to reject potential customers with the same characteristics, educate your sales force and focus all your efforts on customers who are more likely to be good credit risks and therefore great payers. Make sure your credit manager is in constant contact with your sales manager to handle these risks.
Know your customers.
Knowing your customers is the key to collection success, and setting appropriate credit limits is one of the first steps. Set limits based on company credit rating information, but supplement this with your own customer research and reference checks. Whatever credit limit you decide on, make sure you stick to it. If it’s a new customer, start small and only increase the product supply as you see evidence of timely payment. Also, go out and meet your customers and set out rigorous terms of business, get them signed, apply strict payment terms—30 to 60 days from date of invoice—and get customers to stick to them.
Maintain regular contact with your customers.
Make sure there’s regular, friendly contact between your credit manager and the purchasing department of all key customers. Use whatever method gets the best response from a particular customer. It may be phone calls at 8 a.m. or 5 p.m., ongoing emails or a combination of both. Whichever ways you select, always be sure to keep the channels of communication open.
Recovering bad receivables.
The sad fact is, you can try to pick the most eligible and reliable customers, you can agree upon the most stringent terms and conditions and you can have the most transparent relationships—and still things can go wrong. Companies run into difficulties, and you can find yourself struggling to recover a large receivable. Before that occurs, you need to establish a clear process of how to deal with the problem. If good processes are in place, you’ll know immediately when a payment has failed to appear. Ensure cash postings are up-to-date and establish systems to spot late payers the day a receivable becomes overdue. You need to act immediately to be in front of other creditors. Instant follow up is critical; don’t send letters, use the phone.
Don’t be afraid to elevate your claim to the next level.
The purchasing manager you’re in contact with may not have the ability to process your payment, so ask to speak with someone who can. If your company has limited resources, make sure they’re focused on the riskier accounts. Finally, be skeptical—even cynical. It’s amazing how many people will attempt to stretch the truth if their business is facing failure.
Bringing in the lawyers.
If all the above fails and you’re left with a bad receivable, then it’s time to bring in the attorneys and get some good advice. Above all else, you should never be afraid to chase receivables using all the tools at your disposal. More often than not, companies place too much emphasis on protecting customer goodwill. They forget their customer’s primary objective is to preserve and protect its own supply chain. Unpredictable customers give rise to bad business, and so the nearer you can get to a true business partnership with each of your key customers, the more likely your business will succeed.
Ken Dansie is a partner in the assurance and consulting practice of Burr Pilger Mayer and is based in Santa Rosa.You can reach him at (707) 524-6545 or kdansie@bpmllp.com
