The most effective way to manage receivables in your business is to put into place a system that allows management the ability to:

  • Provide credit to eligible customers only
  • Keep track of receivables in a timely manner
  • Trigger follow-up calls/emails/letters for reminders/past due/legal action and
  • Trigger when management intervention or legal recourse becomes the next action.

This allows for the majority of your business’ receivables to be managed in an orderly and efficient manner and also allows problem accounts to surface immediately.  If your system does not adequately address each step,  then receivables may become a major issue for your business.

Convenient purchasing

Providing credit is a cash flow draining strategy for any business and should be viewed as a privilege provided to your customers.  You may be able to expand revenue very quickly by extending lines of credit to customers that would have otherwise not been able to pay for items. However, providing credit then becomes a risk-based decision and you should be aware that the risk may be passed on to external agencies such as credit card companies and financing institutions.

Ideally, you should make the payment experience as painless as possible for both your buyer and your business.  If possible, offer credit card, debit card purchase or PayPal as payment options.

Extending credit should be a decision that your business provides as a special case.  To formalize this, assume that all customers that request credit terms first fill out a credit application form.

Creating a credit judgement criteria checklist

Once you accept the credit application form, you will need to put a system in place that allows you to evaluate the potential customer’s ability to pay on credit terms.  Create a credit judgment criteria list to evaluate each credit application.

Credit references

Credit references are one of the crucial pieces of the credit application. It’s important to follow up with each reference.  A lot of credit checking systems fail due to human error when credit references are not checked.  Make sure this is part of the system and is adhered to by completing the credit judgment criteria checklist.

Advertising credit terms

If your business decides to put itself in a position to shoulder the cost of providing credit, then you should think carefully about using credit terms as an advertising or marketing tool.  Doing so may have the negative effect of draining cash reserves and you should only do so if you are acutely aware of the net cash flow loss that providing credit terms will cause.

Certain industries may have their own ways of using credit terms as marketing tools. Here are some examples:

Professional and Service Industries

One of the major hurdles of professional and service firms is the charge per hour framework that so many businesses find themselves in.  Turn this around by providing fixed price agreements and pricing up front as a marketing tool.  This alleviates the seamlessly endless struggle of getting customers to agree to pay for hourly work and minimizes the need to write-down invoices.

Manufacturing Firms

Credit terms are probably used most as a marketing tool in the manufacturing arena.  This is where credit application forms have the most use and where you should take the most care in screening potential clients.  Because capital requirements may be large with working capital tied up primarily in raw materials, receivables days becomes a crucial financial KPI to watch as well.  If credit terms become the only way a manufacturing business able to differentiate itself from the competition, then the business is putting itself at great risk.  Establish another point of differentiation such as delivery time, product customization options, quality assurance.  If you do not differentiate in any of these arenas, your product is purely a commodity and will be forced to fight on price and credit terms alone.  The first depletes net profit while the other depletes cashflow and working capital.

We can help you understand the impact of your cash flow of either offering credit terms or reducing your days in receivables. It could be significant and it’s different for every business. If you’re interested in finding out what it looks like for your business, contact us today.