Published by CollectionIndustry.Com
May 19, 2002 — by Robert Shultz, currently a Partner in Q2C – a consulting firm focusing on the quote to cash cycle. Mr. Shultz has a successful 30-year track record in a variety of industries within large and multi-national organizations. He has developed hands on management skills and knowledge of all aspects of the quote to cash process, accounts receivable securitization and financing, and equipment leasing programs.
Your company is experiencing an increase in Days Sales Outstanding. Customers, who have paid at, or near terms, are now paying slow. Customer deductions and disputes are increasing. It seems Senior Management views your credit and collection department as the primary pressure point to get cash flow back on track. This scenario sounds all too familiar to many credit professionals today.
The traditional reaction is to review credit policies and tighten where possible. The Credit Department must do what is necessary to reduce risk of slow payment and potential bad debts. The collection process and supporting staff are scrutinized in an effort to find where the ball is being dropped and what corrective actions are necessary.
All this makes perfect sense, but in today’s business environment, these steps focus only on part of the picture. It is critical to go upstream in the quote to cash process. There is a chain of interrelated steps that drive what ultimately becomes an open item on the Aged Trial Balance. This goes far beyond the walls of the credit and collections department. The effort must involve all areas of the business. Pricing and terms policies, product quality, administration of product delivery and return, order entry, billing and cash application all impact a company’s ability to manage incoming cash flow.
The “holistic” approach integrates the entire “revenue chain” and involves all parts of the organization. This requires a review of interrelated processes, organizational structure and supporting systems and automation. Results will be collection performance improvement, better management of credit risk, a more efficient and productive operation as well as reductions in overhead costs, administrative errors and invoice discrepancies.
Following are ideas as to how the credit manager can coordinate other areas within the company and what actions can be taken to improve collection performance at each step of the quote to cash process.
Pricing and Terms of Sale
Terms and pricing are a sales tool but….
In tough times, Sales and Marketing uses credit terms and aggressive pricing as a tool to gain market share. The credit professional must work within this framework and be part of the effort to increase company revenues. However, it is a two way street. The company’s cash flow requirements, administrative capacity and costs must be part of the equation. Coordination and a high level of communication between sales and credit and collections are essential.
Complexity breeds administrative problems
Complex or dynamic pricing policies create a sales administration nightmare. It is critical for Sales Administration and Credit and Collections to play a part in how these policies are formulated. Competitive deals are needed to gain market share. However, if for example, systems supporting pricing tables are not there, the result is manual effort and misunderstanding. This affects both internal operations and even worse, relations between the company and its’ customers.
As pricing and terms policies are being developed all parties responsible for dealing with the aftermath need to participate. The credit professional needs to raise issues and help come up with solutions.
A slave to two masters
Any company granting trade credit is a slave to two masters. One is the cost of funds and lost working capital opportunity and the other is the risk of non-payment by debtors. Extended terms have both a cost and a risk that should be quantified as deals are being developed. The result will be knowledge based business decisions that consider both the competitive marketplace and the financial consequences.
Credit Approval and Review
Implement an integrated credit policy, signed off by senior management
A credit policy must address both the company’s need to generate revenue and the level of risk necessary to remain competitive and meet financial objectives. The credit policy cannot be developed in a vacuum.
The credit professional must be involved from the start and thoroughly understand the company’s objectives and channels of sale. The needs of all areas in the company should be considered. There will always be exceptions. The basis for making “business decisions” on an exception basis should be part of the policy. It is essential for the policy to be signed off and supported by senior management of each area involved. Once the policy is agreed to the road map is set.
The Credit Manager must be involved from the beginning
The Credit Manager must be part of the sales process. It is to sales’ advantage to include the credit manager as new channels or customer relationships are being contemplated. A preliminary credit review of sales prospects can help sales understand the customer’s potential and if special credit arrangements may be required.
Obtain a complete Credit Application
Complete information on the customer is critical if there is a collection issue. The information on the credit application becomes a valuable resource to contact the company’s principal or a senior executive, bank contacts or other trade partners originally listed as trade references.
No surprises on special credit requirements
It is much better for everyone, including the customer, to know about special requirements up-front. Why waste precious sales time on accounts with low potential. If cash terms or some form of security will be required, it is better to communicate this before the sale is in the forecast.
“We never say no…. Yes but how?”
The credit manager must enter the discussion with an attitude of “we never say no, we say yes but how”. With this in place credit will no longer be perceived by sales as the “sales prevention department” or some obscure accounting function. The aim is to motivate sales to seek information from the credit department by being solutions oriented.
Sales must understand both the risks and opportunities that come with the sale. There is the story about the Sales Manager who was upset with the Credit Manager for turning down credit approval on a hot prospect. Several weeks later the Sales Manager learned the target company shut its’ doors. At the next sales meeting he explained to his team, “I was angry because there was no commission to buy the new car I wanted. Now I realize the Credit Manager saved my mortgage”
Credit reviews are essential
Continued credit worthiness must be reviewed on an ongoing basis, both at the customer and portfolio level. This will help to direct sales towards high potential channels and customers and also identify areas with a high risk of delayed payment or bad debt. There are excellent software tools in the marketplace to customize credit policies and automate the analysis. The credit manager can incorporate in the evaluation financial information, historical payment data and ratings from major trade credit organizations. Subjective criteria important to the analysts can be weighted into the model as well.
Examples of when a review should take place:
- Periodically based on the dynamics of the market. (quarterly, bi-annually, but at a minimum annually)
- If there is a significant increase in sales volume
- If the payment pattern shows deterioration
- Negative financial results reported
- Poor trade ratings from industry trade interchange groups or rating services
- Change in senior management or ownership
- High number of trade reference requests
An effective credit hold is no secret
The credit-hold process should be well communicated within the organization. The extent to which customers are given advance notice and the degree to which salespeople are used for collection, varies between industries. It is critical however for sales to know a credit hold is being imposed. This should be communicated as far in advance as the situation allows.
Credit hold is a collection tool and can reduce bad debt exposure
For maximum effect, when a credit hold is imposed, pending shipments are held and order taking is stopped. Most companies handle this manually. Administering this process effectively is critical to both motivate slow payers to pay current and to reduce the risk of non-payment. To the extent that the credit hold process can be incorporated into system based controls it should be.
Network, Network, Network….Education, Education, Education
Credit professionals should take advantage of networking and trade interchange groups such as those offered by Affiliates of the National Association of Credit Management (NACM) and Reimer. This helps keep the pulse on customer risk and industry trends.
The NACM Professional Certification Program provides excellent education opportunities.
Accuracy, visibility and timeliness are key
Order administration accuracy and integration with company pricing, terms and credit policies is key. This is where administrative discrepancies begin. As companies migrate to electronic data interchange and transaction volumes increase, problems reach a new level of complexity and financial impact. For example, if stale dated pricing or incorrect terms or product codes are used, the invoice simply won’t be right. If the invoice is wrong the customer will short pay, deduct or even worse use the discrepancy as an excuse not to pay at all.
Do it right the first time
Processes and system safeguards need to be in place to reduce the opportunity for error. If errors occur there needs to be timely visibility so corrections can be made. Aside from the internal impact and cash flow consequences, this is critical to customer care. Everyone in the organization must work together to do it right the first time.
Create a thorough and accurate customer master
In order for billing activity to flow smoothly through the customer’s accounts payable process, it is critical that all information on the invoice be accurate. This starts with an accurate customer master. If customer contact information or bill to and ship to detail is inaccurate errors and delays will result.
It’s the format ……
Most billing today is accomplished with paper invoices. As billing is converted to an electronic format it is essential for both parties in the transaction to do thorough up-front work. This will insure both the buyer and seller’s system communicate accurately. For those transactions billed by invoice there are pitfalls that can delay payment.
- Eliminate delays in mailing the invoice. Depending on how the customer’s accounts payable policy and system are set up, the date of receipt of invoice may have a lot to do with when payment is made. Timely mailing is particularly important in industries with short terms of sale.
- Clearly state the terms of sale or due date on the invoice.
- As simple as it sounds, make sure the invoice is sent to right location.
- Clearly state the “remit to” address.
- Avoid payments coming directly to the office. Do not include the company address on the invoice. A contact phone number/email address will suffice. Checks sent to a bank lockbox are deposited faster. Checks going to offices get lost or worse, they can be intercepted and fraud becomes an issue.
Question the need for statements
Companies pay invoices. Statements may clutter the desk in accounts payable and take away valuable processing time.
Consider a “Summary Invoice”
If there is a high volume of invoice activity consider providing the customer a summary invoice. With proper backup this can reduce the time required for accounts payable to process payments.
Accuracy cannot be overemphasized
Determine root causes if there are repetitive errors in pricing, product description, quantity, ship to location etc. Quantify the issue and report the problem quickly to all appropriate areas in the organization. Put a meeting together if necessary to brainstorm corrective action and fix the issue.
Migrate to electronic bill presentment
This saves processing time and increases staff productivity. Technologies are available that eliminate mail delay and automate the billing payment relationship. The Internet has opened electronic interchange as a practical solution to companies of any size. Although this does not fit every industry or customer relationship opportunities should be sought after.
Prioritize “customer facing” processes and events
The customer relationship is a critical component of cash flow and risk management. People not technology, ultimately handle exceptions, respond to questions and go the extra mile when asked. Attention to customer needs is critical. Any process step, document or personal contact directly between the company and the customer must be continually reviewed and adjusted to address customer requirements. This takes good communication with the customer and internally between all areas servicing “customer facing” processes.
Organize sales, customer service, collection, dispute reconciliation and cash application teams with common customer assignments.
If a team approach is taken issues will be addressed from all critical viewpoints. Develop people in each functional area as specialists for specific customers, types of customers or customers within particular regions. Emphasize cross-functional communication and problem solving. The aim is to provide one face to the customer no matter the issue.
Utilize lockbox arrangements and keep up with customer remittance policies
Most payments are still made by check. In spite of technological advances the number of checks processed through the US banking system each year continues to increase. The best defense against today’s sophisticated disbursement tactics are strategically located lockboxes. Mail float delay is a factor in cash flow for both buyer and seller. By understanding where payments are coming from, the creditor can establish banking arrangements to minimize mail float.
Take advantage of banking technology
Major lockbox banks provide scanning and same day online viewing of remittance advice. This allows for payments to be deposited as delivered and provides cash appliers and collectors the ability to review remittances in advance of hard copy documentation.
Scanned or electronically imaged remittance detail is be archived for future research. There are choices on how to access the information, by the Internet; or the bank can provide a CD or other electronic record.
Take advantage of autocash technology
Autocash arrangements facilitate application of customer remittance detail directly to the accounts receivable system. If there is a high degree in item matching this can drastically reduce the need for cash applications headcount and speed up the process.
Consider strategic outsourcing
There are excellent service providers among the lock box banks. In some industries credit card sales can provide third party resource, particularly on low dollar, non-strategic business.
Take advantage of data on remittance detail
The customer identifies process and product issues each time a deduction is taken. Tie this valuable information into your process improvement efforts. By understanding root causes as early in the process as possible, the credit professional can provide valuable information throughout the organization. Data gathered will also provide agenda topics for cross-functional process improvement teams.
Collections and Dispute Resolution
Collections is not an accounting function.
Many companies make a mistake by not distinguishing between what is required by the accounting function and collections. Effective collection requires actionable information. The collector and manager must have easy access to up to date information on each customer such as, the outstanding balance, aging, associated risk, payment history, promises made, open disputes and notes of recent contacts.
Effective collections is proactive
Tools must be available to both collectors and management to prioritize contacts. The workday should be structured to maximize customer contact and follow-up. Good account coverage is needed, however, collectors should not spend valuable time contacting volunteer payers or performing unnecessary clerical tasks.
Utilize automated collection tools
Major ERP solutions provide collection and deduction management capabilities to a limited degree. For both ERP users and smaller organizations there are scalable “bolt on” solutions in the marketplace with a wide-range of functionality.
These systems provide access to anyone in the organization with a need to know. The Internet opens information to field or home offices and also enables customers to access their own activity. Providing self-help tools within the company and to customers improves productivity and saves time.
Key functionality to look for includes:
- Ability to assign groups of accounts to a collector or reconciliation analyst
- Ability to define optimal collection strategies based on a customer’s level of risk and payment habits.
- Daily prompting of collection contacts applying strategies to open balances.
- Allow user to enter contact notes with automated tools to reduce keystrokes.
- Automatic prompting for follow-up on promises
- Provide the option to contact by phone, or customizable fax, email or letter.
- If the need is there, provide auto-dial capability
- Provide problem resolution work- flow tools that allow user to assign problem reason codes and identify the responsible resolver in the organization.
- Track historical information such as customer payment history, disputes by type, status and timeframe from identification to resolution.
- Ability for authorized individuals in the company or the customer to access account information and obtain copies of documents such as invoices, credit memos, statements etc.
- Robust management reporting tools.
Eliminate Paper based research
There are services in the marketplace that can archive documents and provide authorized users with Internet access. Using indexing techniques, data elements can be rearranged to provide ad-hoc reports for use in customer dispute research or even for sales and marketing purposes. These services can accept hardcopy documents for scanning, CD’s or tapes or electronic file transfers. Use of this technology can save significant time in research and resolving disputes. This provides additional time for collection staff to focus on cash generating tasks.
Visit your customers regularly
A good relationship with the customer can be the distinguishing factor between creditors who get paid on time and those who do not. It is important for a variety of reasons to conduct on-site visits. You are no longer just a voice on the phone. By being at the customer’s location, you get a first hand look at the level of activity and get to meet the staff and review customer processes. You learn something on every visit. If resources allow, the credit collections manager should consider also bringing the collector or the deduction specialist. Additionally, a team effort, including sales, customer service, operations and information technology, may be the best way to resolve process or systems issues involving both parties. This of course depends on the size and complexity of the relationship and the perceived payback.
Meet with Sales regularly
Sales can provide a set of ears and eyes in the field for the collection organization. Participate in Sales Team meetings. Communicate issues involving their accounts. Seek sales input and help them understand how important it is to report back to you on changes in customer condition or other cash flow related issues.
If you can’t measure it how can you manage it
Establish metrics that define success in collections and dispute resolution. Keep in mind that everyone within the quote to cash process should have skin in the game. This includes sales, operations and customer service as well as the finance functions. It is interesting to report total Days Sales Outstanding (DSO) and to provide detail on the DSO current to terms, disputed and past due. This can be a real eye-opener to Senior Management who might not be aware of the impact of extended terms or the carrying cost of disputes. Some metric examples:
- Days Sales Outstanding
- Best Possible Days Sales Outstanding
- Average Days Past Due
- Past Due Ratio
- Specific Cash Targets
- Average Days to Resolve Deductions
Utilize strategic outsourcing and stick to core competencies that have a pay back
Review collection and reconciliation activity to find areas that are best outsourced to a competent third party. In these times of tight staffs and budgets, collection departments need to focus on critical customer relationships and transactions. Review low dollar activity, non-strategic accounts and seasonal volume fluctuations. These can be handled by a third party and will probably save the company money.
Provide incentives for targets to be met or exceeded
Incentives should be structured to include all who impact target achievement. This will also serve to bring different areas of the organization together as a team. Remember to have fun in the process. Targets should be a stretch but fair, achievable and be focused on group rather than individual performance.
To have a significant impact on incoming cash and collection results all parts of the organization must be devoted to the effort. Depending on the issue at hand, this could involve sales and marketing, operations, customer service, credit and collections, accounting and finance.
The company’s credit and collection policies should address customer needs and the company’s sales, and marketing and financial goals. Guidelines and exception policies should define acceptable terms of sale and credit risks. A mandate is required from senior management to make all this happen.
Using the “holistic” approach, issues can be quickly identified and cross-functional efforts employed toward improvements. As one of the few in the organization with visibility to all the factors involved, the credit professional can become a leader in the improvement effort.