Improve Accounts Receivable with a Strong Credit Policy
Managing accounts receivable (AR) and establishing a strong credit policy are two of the biggest challenges facing mid-sized businesses today. Despite the healthy economy, many companies still face cash flow challenges that inhibit their ability to pay vendor invoices in a timely manner. Others stretch out their vendor payments as far as possible to improve their cash flow, sometimes even paying late if vendors aren’t diligent in enforcing their payment terms.
Of course, accounts receivable and credit policy challenges could be avoided altogether by not issuing trade credit to customers. But this isn’t realistic for very many businesses. In most industries, customers expect to receive payment terms ranging from net-15 or net-30 days to net-60 or even net-90 days for some large retailers. Some big-box retailers like Walmart, for example, are well-known for their extended payment policies.
Walking the Tightrope
Companies walk a tightrope when it comes to making decisions about providing trade credit to customers. On one hand, providing trade credit reduces working capital in the short term. But on the other hand, being too restrictive in providing trade credit can result in lost sales if customers decide to work with other vendors who are more liberal in their trade credit practices.
Providing trade credit can be a valuable sales tool when working with customers that have a limited or even damaged credit history. But this practice may carry significant risk: If these customers fail to pay their invoices on time, your company’s cash flow and working capital will be negatively impacted. And if they fail to pay their invoices at all, your revenue will suffer, and the customer will still have possession of the products you sold them.
Failure to implement a sound credit policy and mange accounts receivable effectively can lead to several negative impacts on your business, including the following:
- Late customer payments will negatively impact your working capital and cash flow, while customer non-payments will hit both your revenue and your profit margins. You’ll also lose the inventory that the non-paying customer now possess.
- Efforts to collect past-due AR can lead to tension between your business and your customers, potentially straining the business relationship.
- The time spent following up on and trying to collect past-due AR can be a drain on management, diverting their attention from more productive tasks that add to your company’s bottom line.
A Time-Consuming Task
Establishing a trade credit policy and managing accounts receivable balances and collections are time-consuming tasks that many mid-sized businesses don’t have the resources or expertise needed to perform well. An on-demand part-time CFO or project CFO from a CFO services firm can help you set policies for granting trade credit that will be the most beneficial for both your business and your customers.
A former enterprise CFO will have a keen understanding of parameters that should be set when making trade credit decisions while bringing the necessary analytics to determine such issues as:
- The amount of trade credit that should be granted,
- Credit and payment terms, and
- The potential for offering early payment discounts.
A CFO partner will implement a structured approach to the monitoring of individual account balances and be skilled in the necessary customer interactions to insure collection of outstanding balances. He or she will also know when it is necessary to bring in an external collection agency, understanding what the potential tradeoffs of doing so might be.
Your company could realize several benefits by hiring a CFO services professional to help you with setting trade a credit policy and managing accounts receivable, including the following:
- You’ll have a standard process for credit evaluation to ensure that credit levels are set properly.
- You’ll have a standard process for the ongoing maintenance and review of all credit accounts to ensure minimal AR write-offs.
- Your credit policies will help insure collection of AR while not inhibiting revenue.
- Your AR policies will work together with customers to strengthen supplier-customer relationships, rather than put undue burdens on the relationships. Your customers will have a good feeling about working with you and want to do more, rather than less, business with your company.
Establishing a strong credit policy and managing accounts receivable (AR) are two of the biggest challenges facing mid-sized businesses today. Despite the healthy economy, many companies still face cash flow challenges that inhibit their ability to pay vendor invoices in a timely manner, while others stretch out their vendor payments as far as possible to improve their cash flow. Engaged only for the time needed, a part-time CFO or project CFO can help you set effective policies for granting trade credit and implement a structured approach to the monitoring of individual account balances.
Mark S. Becker, Partner, CFO Edge, LLC