Collection Tactics

As I observe the continual, unnerving changes in our modern business environment and try to make sense of it all, one thought constantly comes to mind: We have to manage our business with much more diligence than ever before. As scary as the idea might be, we are all potentially only one poor decision away from going out of business.

So how do you avoid such a worst-case scenario? You manage with more diligence. And you start with your cash. Even in the worst of times, if you’re successfully managing your cash, you will probably survive. And in good times, you’ll be able to build up cash reserves. How exciting would that be?

Cash monitoring
So what actions can you take to help in this effort? Well, if you aren’t already doing so, immediately begin monitoring your cash on a daily basis. While this may sound like an overwhelming task, it can really be rather easy. Your first step is to put together a simple spreadsheet that will act as a dashboard for your cash positions. The key elements that you can begin measuring include: cash balances; outstanding aged accounts receivable; outstanding aged accounts payable; and any significant cash commitments for the current week, such as payroll, taxes, etc.

Once you begin measuring and monitoring these numbers on a daily basis, you’ll begin to see some trends that will help you improve your daily cash flow.

For example, if your accounts-receivable balance averages close to 60 days and your accounts-payable balance averages 30 to 40 days, you probably have a cash-flow problem to deal with. You will also soon see cash-balance trends during different periods of the month that will help you plan more carefully for significant cash outflows such as payroll or taxes. Watching your cash positions and obligations on a daily basis should be a consistent practice in your daily management routine.

Three tactics
Collecting your receivables is likely the most challenging aspect of cash-flow management. And at the risk of sounding like a broken record, the answer here is daily diligence. Whether you hire someone full time or someone who devotes a specific amount of hours per day on collection efforts, this task must receive its deserved attention to make a difference.

In the past few years, we have seen more and more of our large customers – that is, those with leverage – insist on extended payment terms such as net 60 days, along with fewer and fewer of our own vendors offering reasonable discounts for early payment. These factors have made cash-flow management all the more challenging.

To help in your receivables collections, consider the following tactics:

• Don’t collect on accounts by committee: If you’re able to designate one person to be in charge of your collections, then the people on the other end of the call will get used to dealing with that person all the time. A relationship – ideally, an amicable one – will begin to develop and you will find better success. But the key is devoting a lot of attention to daily collections.

• Ensure your collection process begins long before the account becomes overdue: Surely you’re familiar with those of your customers that are traditionally slow to pay. Get ahead of the game by making sure at the two-week mark that all invoices from your company are recorded and approved in your customer’s payable system (our A/P clerk simply makes a call to our customer’s A/P rep). That alone can make a tremendous difference in the collection process. Some of your major clients may actually pay very well, but if you don’t follow the proper protocols for payment such as authorized purchase orders, proper approvals, etc., you’ll always end up with delayed payments. By taking a proactive approach, you can stay on top of traditionally slow payers and help avoid a lengthy collection process.

• Set some policies that have some teeth: For example, if a customer’s account is 60 days overdue, don’t be afraid to place them on credit hold and refuse to release any further work until they are caught up on their account. This hardball approach might make you a little nervous about losing your client, but don’t worry. Let them know that this is your company policy and it applies to 100-percent of your customers.

The best way to execute this type of approach is to immediately let them know when a new job hits your shop. Make the call that very day to the person ordering the job, letting them know their account is overdue and that, as a result, the current job is in jeopardy. They, then, can help you communicate with their own accounting department. After all, they are the ones that really need you to release the job, not the accounting department. This will give you a few days leeway for your client to work out payment arrangements. (Typically, by the way, the person ordering the job has no idea the account is overdue.)

Our business has had this policy for several years and all of our customers, including our top ones, know about it and understand it. Adopting a specific policy such as this – and enforcing it – will help your slow-paying clients understand that in order to do business with you they’ll have to pay on a timely basis. Again, this approach shouldn’t make you nervous about your relationship with your customers – it’s a reasonable request to be paid on time for your products and services.

Assigning risk ratings
My final recommendation is something we have recently implemented here at Ferrari Color. We’ve gone through our top 25 clients, which make up the majority of our sales and our accounts receivable, and have assigned each one a risk rating between 1 and 5. If a customer is assigned a risk rating of 1, the highest risk, they are handled very carefully in terms of issuing any significant amount of credit. On the other hand, we should be comfortable that a customer with a risk rating of 5 will pay on time, without issues.

Importantly, our risk rating is actually a mix of two different types of risk. The first is simply an assessment of their financial health, payment history, average days outstanding, etc.

The second risk factor, however, takes into account the impact that the customer would have on our business if they were to file for bankruptcy at any given time and their account balance would have to be written off. This is a much scarier assessment when considering our largest clients. For example, our top two or three customers might typically pay within a reasonable amount of time, but the financial impact of writing off their balance as bad debt would be huge. So those customers may not be the highest risk because they pay on time, but they earn a 2 or 3 risk rating because of the impact their failure would have on our bottom line.

After categorizing your top customers, the idea is to then appropriately manage each customer-risk pool. That could include monthly financial credit reports, weekly calls on outstanding balances, securing personal guarantees from business owners, predefining down-payment requirements on larger jobs, securing credit cards as payment security, or anything that might mitigate your risk.

With a large customer, such as a publicly traded company, many of these options are probably not available. So, instead, we review the quarterly financial results when earnings are released and try to determine the overall health of the company (or, in some cases, the parent company). Just because a company is big and public, don’t be fooled into thinking you’re immune from their account going bad – big companies go out of business all the time. The point here is to adopt a system where you are trying your best to protect yourself from something happening that might place your business in peril.
 

Marty McGhie is VP finance/operations of Ferrari Color, a digital-imaging center with Salt Lake City, San Francisco, and Sacramento locations. The company offers high-quanlity large- and grand-format photo, inkjet, fabric, and UV printing. [email protected]