Top Reason Businesses Fail with Internal Cash Flow, Credit & Collection Initiatives
Top Reason Businesses Fail with Internal Collection Initiatives
LACK OF POLICY
In order to do absolutely ANYTHING effectively in life, there are steps you must take to do so. Can you drink a glass of water, if you have not filled the glass with water? Can you start your car if you have not put the key in the ignition? Would you begin putting your pants on, by first zipping your zipper? Would you begin watering your garden before you planted the seeds? These questions are of course very simple and common sense oriented. However, so is the cash flow process? Without policy, a written scheduled directive of the flow process for an internal receivables staff to execute, how can you possibly believe that your business will succeed?
Would you send a final demand notice to a client whose invoice is not even due yet? Would you extend a credit line of $50,000 to a company who had dissolved 4 prior business ventures in the past 3 years and simply changed their company name to escape past creditors? If on your aging report you see a client who had a balance due in each bucket from current to 180 days , would you approve credit again on their next order? If a client called you and said YOU ARE NOT MY PRIORITY, I have other vendors that need the money I owe them more then you do, would you continue to act as their bank, just to say you have them as a customer?
Now for you these scenarios may seem silly. However many business executives admit they either have no policy in place, have not taking the time to create a policy or if they have written a policy it was never implemented, executed delegated or acted upon. Financial Executives review their aging report only to find thousands of dollars (or more) collecting dust in aging buckets rather than being an asset as cash flow. High DSO, unnecessary write offs and low cash flow all stem from a lack of strong, detailed, implemented, executed, staff trained, enforced Receivables, Credit & Collections policy.
CREATE, DOCUMENT, DELEGATE, EXECUTE, ENFORCE, & MEASURE POLICY.
Now it is time to sit down and CREATE your cash flow policy. Consider all aspects along the flow process. From potential client screening, to data entry and follow through of credit applications, to the documents that should be included in your credit screening package ( ensure signatures are requested on all documents), to the criteria schedule of credit terms and conditions extended, "new client tracking ", annual current client "check ups", and a strict schedule of the collections process. For example:
1 courtesy call prior to due date
2 calls post date
2 late notices
1 final demand
Submission to a third party agency no later than 90 days past due
Also always ensure there is ONLY 1 employee with the authorization capability to extend payments arrangements and lift suspension of credit without payment. If everyone has the authority to make exceptions to YOUR policy, why are you creating it?
Now, Document your policy in writing for your accounting staff, sales staff, and customer service staff to review. You may say why would Sales or Customer Service need to review and understand a receivables Policy. When a salesperson is to the point where they are getting ready to close a sale, their heart is beating, their blood pressure is high, they are excited...they are going for THE CLOSE. Do you think that a credit application being incomplete is going to stop them from making that sale? Do you think that a Customer Service Rep who has been appeasing a client for 20 minutes into her lunch break is going to continue and try to gather all of the facts regarding the dispute, or are they going to tell the customer they will issue a credit so she can run to the break room and get the latest "water cooler" gossip?
Can you walk properly if only one leg moves? Can you pick up something if only 2 fingers bend for grasp? Everyone involved directly, and indirectly should know what the policy consists of. From credit applicant screening, to criteria for credit terms and conditions, which documents are in need of signature and once you extend credit, who will be watching the new client for the first year, to ensure habits don't change. Every single step should be outlined as a directive in writing, and each person within your organization should know their part. This is important when writing your policy; ensure you DELEGATE responsibility for each item to a department head or specific title within your organization. Avoid using individual names if possible, you don't want to have to change the document each time an employee comes or leaves. However using a title or department head shows who is responsible for each directive and they will be the ones to hold accountability.
The salesperson should know they can NOT close that sale until that credit application is approved. The Customer Service Rep should know she can NOT offer a credit without all of the facts. Your collections team should know that after 3 phone calls, 2 voice messages, 2 late notices and a final demand letter 2 weeks ago, the account is immediately placed into collections BEFORE it rolls into the 90 day bucket. (These are just examples of collection schedules).
You have created your policy, you have documented it, and you have delegated the procedures and responsibilities. Now it is time for execution. Do not think that simply because YOU understand the process and procedures within your policy that your employees do as well. EVERYONE should understand clearly, so to have as little trial and error proceeding forward. So, meet, speak, answer questions, explain, reiterate. ENSURE that each department, each manager, each employee knows their responsibility and that of the other departments. If a client calls and wants to place an order, does the customer service rep know who to contact for a credit application? If a sales person receives a call and their client requests an extension of credit terms, who should they contact? All of this is menial yet crucial!
Enforcement should be easy as long as you made your policy clear and concise with limited flexibility available. There will be trial and error, it is new and different. Not only internally but with your clients as well. No one is happy about change, until they see the benefits from that change."Through Change, Comes Growth". Take complaints, ridicule and resistance in great stride. In the end, your cash flow will improve, your bonus will increase and your businesses reputation will by far be complemented.
Last but certainly not least is the CONSISTENT MEASURING OF THE POLICY. Do not be mislead there is ALWAYS room for improvement. On a monthly basis, you should review your financial reports. On a monthly basis assigned employees should monitor and measure the new clients who have been extended credit and ensure there are no red flag signals emerging. If there are, there should be IMMEDIATE measures taking to prevent loss. Annually, all clients, both new and current should be reviewed. Even long term customers should receive a financial "check up". Not many thought that Boscov's or KB Toys would file for Bankruptcy. One year EVERY salesperson on earth wanted to meet with their VP of Purchasing, the next year, they were in the process of dissolution. The point is , One NEVER knows, but you can secure the amount of loss through regular checkups and research.
Each month, following your newly expedited policy, there will be improvement. Each quarter there should be improvement. When you reach a point where there is no obvious improvement revisit the policy and search for additional tweaks to bring ongoing improvement.
In conclusion, as a company’s receivables can account for nearly 40% of their assets, implementing a strong clear and consistent receivables, credit and collections policy is vital in the health of your receivables and the success of your company’s growth process. Ensuring that a policy has been created, implemented and enforced will safeguard your overall cash flow and allow customers to respect the structure and stability which comes with a strong internal policy and process.
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Jennifer Stacey
