I assist troubled companies that have poor credit policies and are trying to improve their accounts receivable. In 30 years of doing so, I frequently encounter stressed out credit managers. The credit manager is taking heat for the companies’ cash flow troubles. All to often, the credit manager was trying to shine a light on larger issues that negatively affect accounts receivable performance. Here are the key things that can help you and your company improve its credit policies and avoid the serious cash flow issues that result from a poor accounts receivable aging.
Know Who Uses the Credit Policy
This sounds simple, but this edict often falls to the way side. The credit policy isn’t just for customers, it is for your internal staff too. A clear credit policy improves customer service by setting clear expectations for sales staff. In turn the sales staff provides clearer expectations to customers. Customer service, billing, credit, and collections staff benefit from knowing the boundaries too. It promotes consistent messaging for customers. If the credit policy is too tight or rigid, then the stakeholders can agree on changes. As changes are made, you are able to measure the impact. A clear credit policy helps manage delinquency. Senior management must be involved in setting the tone for your company. The credit policy is a compilation of expectations for customers and internal departments and the entire company must get behind it and support it.
Reign in Accounts Receivable Exceptions
You can’t eliminate every exception. Credit and accounts receivable management requires flexibility and judgment calls. If your salespeople constantly require exceptions for needy customers, it is often a sign that those customers aren’t as good as the sales people purport them to be.
Exceptions don’t just lie within the selling process. Does your company have departments that are backlogged which causes a negative impact on your aging? Is billing slow to issue credits? Is cash posting behind and/or unorganized? Does your collection staff cater to customers asking for long term payments? These issues dilute your efforts to improve cash flow. Prevent dilution by stepping back and looking at the problems from a distance. Can you clarify your policy to eliminate the sales exceptions? Can you work with your management team to eliminate log jams and improve procedures? The company may think these are “internal” issues; however, I have found that correcting these problems improves your customer’s experience. Their experience is not limited to buying a product, they continue to “experience” your company through the time they remit payment. If your back office requires improvement, chances are your customers know this too and all the window dressing to make their sales experience exceptional can be eroded quickly during the invoice to cash process.
Decisiveness Impacts Accounts Receivable
A weak credit policy makes for weak decisions. Customers are likely to expect exceptions if your sales and collections staff are undermining policy by offering exceptions at every turn. A decisive credit policy sets clear expectations about what is/isn’t acceptable; from establishing the size of credit lines and the documentation required to complete a sale, to escalating collection action on accounts that fall delinquent. Customers that know you will escalate their accounts to collections will pay you faster. Avoid indecisiveness, a weak credit policy attracts the bottom feeders in just about any industry. When that happens, customers that are under-funded make up a greater share of your aging making it more challenging to control delinquency.
Educate & Communicate
As you fine tune and adjust your credit policy, share the changes with all the stakeholders, i.e. management, sales, operations, credit/collections, and customers. Revisit the basic tenants of the credit policy frequently to ensure everyone is on the same page. When you do, you will find a “one company” approach makes it easy to reduce exceptions and manage delinquency proactively.
For more information about improving your credit policy and procedures to reduce delinquency, feel free to reach out to me. I am happy to assist you with your unique challenges. Reach Kelly Cronan by phone at 763 315 9660 or by email.