DEVELOPING ACCOUNTS RECEIVABLES COLLECTION SYSTEM

Every company survives because of the income it receives from selling its products or services. Sounds obvious, right? Perhaps not. Many companies are in such a hurry to “make the sale”, that the correct amount of preparation and forethought is not undertaken when selling goods and services on credit. Of course, selling on credit is imperative to generating business volume. Many smaller companies are going to need to finance large asset purchases like heavy machinery, buildings, or other capital assets. Many larger companies conduct so much business that it is impractical to do so through the course of several thousand small transactions. In either case, it seems to make more sense to extend credit to these types of entities, and collect in 15, 30, or 60 days. Accordingly, the development of an effective accounts receivable system is clearly a major operational priority.

Insight:
In many organizations, late payments or non-payments of receivables are devastating from an operational standpoint because they tend to squeeze the cash account and therefore, managerial functions. Furthermore, they undermine short and long-term tactical planning.

Question:
Is it realistic to collect 100% of all accounts receivables?

Answer:
Yes. Despite conventional wisdom, it is ABSOLUTELY a reasonable expectation to “recoup” 100% of your receivables. The system you will put in place will determine the recovery success.

Process:
Of course, there are many considerations you need to acknowledge when developing a 100% collection model. This is not to say that this will necessarily be the most feasible, as achieving the optimal rate will involve a trade-off between business volume and collectability. However, this discussion is to address the process for collecting receivables in its purest form. The following two processes will create a solid framework for an efficient accounts receivable program.

A. CUSTOMER ACCEPTANCE METHODOLOGY:
Not everyone can buy what you sell.
The “Customer Acceptance Methodology” represents the main issue in most collection systems. Many organizations could increase substantially their recovery percentage if they could only sell to those customers who can “fully” buy their products/services. “Fully” means having the willingness to buy WITH the purchasing power to pay in full when the invoice comes due. This is fundamentally a front-end rather than a back-end issue. If for example, an organization sells high-priced luxury items yet the majority of its customer base earns average incomes, then it is very likely that the receivables’ recovery percentage will be low. Many sales managers do not fully understand the true meaning of “Targeted Marketing”. Most of them believe that targeted marketing only refers to finding those customers who would be interested in buying a company’s products/services. These Sales Managers are only excited about the “Sale”. These managers haven’t recognized that targeted marketing also means attracting those customers who possess the requisite purchasing power.

Therefore, any accounts receivable programs must have a strong control mechanism to prevent the company from selling to customers who cannot “fully” purchase its products/services. And yes, the installation of this control can be painful because many potential customers may be turned away.

B. TRIGGER MECHANISMS:
Everyone should be treated the same.
Trigger Mechanisms refer to those sets of actions that will take effect over the life of an invoice. An invoice can have a positive or delinquent lifespan. The main goals for these trigger mechanisms are to promote consistently a positive life of an invoice. A trigger can either be an e-mail reminder, a phone call, a personal visit, a payment plan enrollment, etc. Each trigger should go in effect based the actual situation of each invoice.
Here are some essential guidelines to follow when implementing these triggers:

UNIFORMITY:
Each customer is to be treated as a potential delinquent case. Even if the customer has had a positive history with the organization, the trigger should still assume the worst-case scenario. This rule will prevent those responsible for collecting accounts receivable from establishing their personal procedures. The goal here is to eliminate ambiguity.

AUTOMATION:
Automating triggers will prevent human errors and guarantees on-time delivery, which will contribute to the positive life of an invoice.