Acct. Receivable - Good And Bad

You have produced a product, made 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 plan. Credit is used to facilitate sales but should not be controlled by the sales group. Upper management should determine what constitutes credit worthiness based on sound cost benefit evaluation. The policy should be passed to the sales employees and accounts receivables department in written form. Because any variation of this policy changes the dynamics of the sale; exceptions to the provided documentation should be made only occassionally and by upper management.

Proper evaluation of potential customers is the next area of importance. 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 the customers business and the ease 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 client has your product or service and you have an IOU. Here is where careful finesse starts. It is necessary to convey your expectations to your customer as soon as the account reaches its first mile stone... their due date. If the client 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 quietly.

If after all of your efforts towards 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 send some amount if they are making a good faith effort; and every dollar cuts your losses by that much. If the amount involved justifies it, tell the customer that you will have an employee stop 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 definately applies to the accounts receivable department. With the proper realization of the cost of overdue debts and a dedication to the constant monitoring of your accounts, this department will contribute a lot to the revenue cycle.