Jimmie Williams, Jr.
Bradleys', Inc.
Cash flow is the heartbeat of every successful service business. Balancing the ebb and flow between Accounts Payable and Accounts Receivable is a struggle, especially when the customers do not pay within the negotiated term. If a company’s credit requirements are too stringent, we may lose good customers. If too lenient, we are left holding an empty money bag. We’ve all been burned at least once by a publicly traded corporation due to their financial failure. Of the 188 respondents to the recent Management Pulse survey on customer credit applications, 85% extend credit terms to their customers.
Keeping past due invoices at minimum
So, how do we control our Accounts Receivable (AR) so the past due customer invoices remain below 1% of the AR total?
Many large companies use online services such as Ariba that send notifications when the invoice is approved and the payment date is provided. For the others, it is a bit more difficult. A good start is to establish an Accounts Receivable process requiring a follow-up call on all invoices within 7 days, and attach personal accountability for that employee. This improves the payment timeline when an invoice was not received or the customer has a problem.
Advance payments and credit
Of the survey respondents, the 85 percent who extend credit indicated that they have a form or written process for credit applications.
The key is to not bend or break the policy on a regular basis. The good ol’ “try before we trust” is an excellent way to establish credit for a new customer. In other words, the customer must pay the first few invoices before shipment. One question in the survey asked for the “percentage of sales handled with payments at the time of pickup or delivery such that credit is not required.” Of 186 who answered this question, the average was 14%. The average percentage of sales through credit cards was 19% which can cost of up to 3% or more of the invoiced total in fees.
Researching customers
Thirty five percent of the 188 respondents use Dun & Bradstreet® (D&B) to establish credit limits for their publicly traded new customers to assess their financial viability. How many of us run the D&B or read the financial stock reports annually of our publicly traded existing customers to manage their credit limits? It is always better to be proactive (and safe), than sorry.
Only 38% of the respondents ask their new customers how much credit they want. Understanding the customer’s credit needs is particularly useful when establishing a credit limit, but it is also great information for the sales team to update annually so customer deliveries are not delayed due to credit limit issues.
Of the 188 survey respondents, 67% use credit references to set credit limits. After approving customer credit limits for a few years, it never ceases to amaze how many customers will send in a motor repair with a quote exceeding $60,000, but only provide references with a credit limit history to support $20,000 or provide credit references that show poor or very slow payment history requiring a request for more references.
Only 45% of the respondents ask new customers whether the company and/or owners have filed bankruptcy. Surprisingly, people answer the question honestly. Google is also a great resource for obtaining these public notifications for those who are not as forthcoming.
At the end of day, cash flow is improved by training customers to pay in a timely manner. To do this, it is important to establish a good credit policy and train employees to manage the customer’s credit limit.
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