Business Collections - The Good and the Bad

By: James Aycock

You have made a product, made a sale and made a good margin, right? If the sale was made on credit, the sale is far from over.
The opportunity cost of money 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 successful accounts receivable department starts with a good credit and collection policy. Credit is used to facilitate sales but should not be controlled by the sales department. Upper management should determine what constitutes credit worthiness based on sound cost benefit evaluation. The policy should be sent to the sales department and receivables department in written form. Because any variation of this policy changes the dynamics of the sale; exceptions to the rule should be made only occassionally and by upper management.
Proper evaluation of the potential customer is the next area to focus on. While credit reporting agencies are important, the customers trade history is more indicative of what you can expect. Another consideration is how invaluable your product or service is to your customers revenue cycle and the difficulty 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 customer has your products or services and you have an outstanding bill. Here is where proper client interaction starts. It is imperative to communicate your expectations to your client as soon as their account reaches its first mile stone... their due date. If the customer is trying to conserve his cash, he might hold payment until contacted. 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 delay someone else. If a payment is promised at a certain time, 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 entire amount. Customers should be able to send something if they are attempting to make a good faith effort; and every dollar paid cuts your losses by that much. If the amount involved justifies it, tell the customer that you will have a team member 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 specific deadline to write the check. If possible, get the repayment 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 all accounts receivable department. With the proper realization of the cost of overdue debts and a dedication to the constant monitoring of the accounts, this department will contribute a great deal to the revenue cycle.

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The author is James B. Acock of www.DallasBusinessBuilders.com. Mr. Acock is a financial expert in Frisco Texas specializing in helping small business owners grow into medium and large corporations.

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