“Most Important Asset on Your Balance Sheet”

In the world of Credit and Collections you’ll constantly here about how important your Receivables are to your business. As professionals managing Accounts Receivable it’s understandable that you’d be passionate about the one specific piece of the balance sheet you have the most significant influence over. Its importance is typically felt within small and medium size businesses as it serves as the lifeblood of the organization. It can be indicative of how well you’re doing as a business from a sales perspective, it feeds your working capital, and it’s part of the ever important cash flow of the business albeit somewhere between outflow and inflow of cash. Managed correctly, that “receivable” will turn into cash inflow.

Accounts Receivable is essentially a “loan” you’ve extended your customer which, presumably, will be paid at some point after goods and/or services are received. As a small business it’s difficult to immediately build into your finance process stringent credit review mechanisms. However, if set up correctly you could automate this process and essentially keep your costs down while still ensuring you’re putting good receivables on the books. One thing is for certain, you should never NOT have a credit review process. As one of the most important assets on a balance sheet, businesses have to ensure that they have the right balance of extending open credit terms tempered by those terms that may require tighter requirements. At the end of the day credit processes and reviews should be a short term look at a potential customer’s capacity, capital, and general condition. Sound familiar? It should because those are key components of the 5 C’s of Credit (Character, Capacity, Capital, Conditions, and Collateral). Automated processes can track and monitor changes in a customer’s credit profile. There are plenty of solutions in the market place to facilitate automated credit processes for both the smallest and largest businesses. Some notable solutions are provided by Dun & Bradstreet, Credit Risk Monitor, Creditsafe, and Cortera. Larger enterprise applications (i.e. Oracle, SAP) will usually offer specific credit and collection or overall AR modules into which the aforementioned solutions can be integrated.

Once you’ve made a sale on open credit terms that sale becomes money owed to you. The faster you’re able to collect relative to those terms the better you’ll be at maximizing your cash flow. This can be tricky for your collection organization because you can’t be too aggressive for fear of aggravating your customer relationship, but you don’t want to be lackadaisical because of the negative impact carrying those receivables for too long can have on your business. Ensure you’re using a mix of tactics to pursue the money that is owed to you. For example, perhaps utilizing a courtesy call a week or so in advance of payment being due can bring to light any issues the customer may have that would impact their ability to pay timely. Utilize a mix of calls, emails, and notices in your overall strategy. No tactic will trump making a phone call, but if you have a large customer base or exceptionally high volumes and can’t afford to contact every client automated emails and notices for smaller, lower risk accounts might make more sense. Leaving your collector’s the task of calling the higher priority customers. Make sure that whatever strategy you employ it is consistent and recurring. The rhythm and cadence used will be reflected in the timeliness in which you’re paid. At the end of the day it’s all about turning those receivables into the cash you can use to refuel your business.

The last thing to keep in mind when managing this most important asset is tracking metrics that not only show the performance of the team, but the health of your overall customer portfolio. Track your DSO (Days Sales Outstanding), best possible DSO, AR Turnover and establish a risk profile that can be appended to your portfolio. A simple high, medium, low risk scale is generally a quick way to determine where you may have to focus more efforts or what profiles may require more diligent credit review. As previously mentioned there are a myriad of solutions in the marketplace to help you build a risk profile and with advances in the analysis of data some of those models can help predict a customer’s behavior. While much of this may seem obvious and likely steps you’re taking to manage your accounts receivable, you can never overstate the importance of having a strong credit control upfront in your process, letting credit reviews influence your downstream collection activity, and the importance of having an overall sound collection strategy. 

Written by Chris Rios, Warner Brothers Music, GHR Board