Bad receivables can have a devastating impact on your company. It’s easy for cash flow to slow down or dry up, causing working capital shortfalls that affect all areas of your business. These five steps can improve collections, reduce write-offs, and maintain a consistent cash flow.
- Know your existing customer base and set appropriate credit limits. Set credit limits based not only on information from outside credit rating sources but also by evaluating your history with your customers. Start new customers with smaller credit limits. Review those limits on a regular basis, and increase them only after the customer establishes a consistent, reliable payment history. Do not hesitate to meet with customers to discuss credit and payment terms.
- Conduct due diligence before accepting new customers. Perform background and credit history checks as an initial step before accepting new business. Initiate this early in the process, even before your company begins marketing to potential new customers. As a result of your research, you may decide not to pursue prospects with poor credit histories as they may create additional costs for your business.
- Assess the viability of late payers. A business needs to focus on lost opportunities to sell to more profitable and creditworthy customers. Spending time chasing customers for payment takes significant resources and energy. Many companies derive significant profit from a small number of customers, so protecting the core business is key to ensuring profitability.
- Use experienced credit managers to maintain regular customer contact. These credit managers need to develop techniques to elicit the best responses from their customers whether it is by phone, emails, letters, or all three. Credit managers also need to make sure they are in contact with the right individuals. If a credit manager is working with someone who does not have the authority to process a payment, ask to speak to someone at the company who does.
- Establish a collection process to deal with problem receivables before they occur. Companies that establish good processes and controls know immediately when their customers are delinquent with payments. Credit managers and accounting personnel should review receivable aging and daily collection reports on a weekly basis at a minimum. This allows you to act quickly and pursue past-due accounts before they get out of hand.
Be sure to use all of the tools at your disposal. This may include using attorneys or a credit collection agency to pursue delinquent payers. While you want to protect your relationships with your customers, keep in mind that your customers also need to protect their own supply chain. In many instances, if a company is using outside resources, the relationship may already be damaged.
Your customers are your lifeblood. Unpredictable customers can add unwanted strain to your business, especially in these difficult economic times. Establishing good relationships with your customers includes creating payment terms and conditions that allow both parties to succeed and grow within a true, long-term business partnership.
Richard Snyder can be reached at Email or 215.441.4600.