Accounts Receivable
The Double Edged Sword

You have produced a product, generated a sale and made a good margin, right? If the sale was made on credit, the story 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 conveyed to the sales department and accounts receivable department in written form. Because any variation of this policy changes the dynamics of the sale, exceptions to the rule should be made only rarely and by upper management.

Proper evaluation of the potential customer is the next area of importance. While credit reporting agencies are important, the trade history is more indicative of what you can expect. Another consideration is how important your product or service is to the customers revenue cycle and the difficulty of finding another source. Based on these and other evaluations, a credit limit and terms should be determined and conveyed to the customer up front.

Now, your customer has your product or service and you have an “IOU”. Here is where the finesse begins. It is necessary to communicate your expectations with your customer as soon as the account reaches its first mile stone; due date. If the customer is trying to conserve his cash, he might hold payment until contacted. The contact is much more pleasant at 32 days than at 92 days. 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 little often than to wait for them to be able to pay the whole amount. They should be able to pay some amount if they are making a good faith effort and every dollar cuts your losses by that much. If the amounts involved justify it, tell the customer that you will have someone 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 hard deadline to write the check. If possible, get the payment plan in the form of a promissory note. This gives the debt a higher position in case of a bankruptcy.

An ounce of prevention is worth a pound of cure certainly applies to the accounts receivable department. With the proper realization of the cost to them company of having the outstanding debts and a dedication to the constant vigil of the accounts, this department will contribute its part to the revenue cycle.

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