Extra Credit Newsletter - Accounts Receivable: How to Tame the Beast

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The following newsletter contains information to benefit credit and risk management professionals, and is being sent to you as a client or contact of Trade Risk Group, a leading specialty broker for credit insurance. For comments, to unsubscribe, or to find out more about credit insurance, please contact gene.ferraiolo@traderiskgroup.com

Accounts Receivable: How to Tame the Beast
You don't want to wrestle with Your accounts receivables - You just want to tame them.

If you take steps to manage your receivables by applying the right kind of pressure at the right time, the beast can be tamed. Following are seven steps:

It's simple: If you take it seriously, they'll take it seriously. On the other hand, if you treat receivables lightly, and allow your customers to take advantage of you, they will. What does "taking it seriously," mean? It means:

• Establishing policies and procedures that will help you make decisions as and easier.
• Making a commitment to properly train yourself and your employees in how to manage and collect receivables.
• Being certain your customers understand your terms and intentions.
• Understanding and using the tools and services that are available to you.

The Second Rule: Do Something Every Twenty Days
Nothing is more effective than a systematic, controlled approach to receivable management. Step-by-step procedures are the key:

We have had great results with a process we call the "Twenty Day Diary." Here's how it works:

• Day one, you make a sale, deliver products, and issue an invoice with terms set at NET 30 days.
• Twenty days later - ten days before the receivable is due - you call the customer. This is a pre-collection call that doubles as a service call.
• You ask if the order was received, if everything was satisfactory, if they have the invoice, and if they understand the terms.
• If there is a problem, you have a chance to fix it before the due date, and everybody is happy. If there is no problem, you know the customer is satisfied and is likely to pay on time, and the customer knows you care.
• The next call (if necessary) is then scheduled for twenty days after that - ten days after the due date. If a genuine problem has arisen, it's early enough to deal with it efficiently. But if your being stalled, you'll know that, too, and you can act accordingly.

The secret is to be systematic and organized. We call it the "Twenty Day Diary" because to make it work, you have to keep track. Write down what was said, when, by whom, every step of the way, and you can't go wrong.

The Third Rule: Don't Turn Your Back on Them
Extending credit to another company involves risk. Of course, in most cases, the risk is part of the cost of doing business, and it is acceptable…so long as it is managed properly.

Even if you were not able to apply any other Rules to your business, we urge you to apply this one. Why? Because untended receivables can get out of control in the blink of an eye. And out of control is the first step towards being out of business. Here are some danger signals you can watch for:
• Slow payments or a change in payment habits
• Broken promises of payment
• Unreturned messages
• Postdated or NSF checks
• Refinancing or changing banks
• Unauthorized return of merchandise
• Selling at unusually low prices
• Radical changes in buying patterns
• Too rapid growth

The Forth Rule: Don't Show them any Weakness
It's called "sticking to your guns". When you set terms, be determined to communicate them and to stick to them, no matter what. Remember, a deal is a deal. You've fulfilled your obligations, now it's their turn.

You do it by stating your terms and intentions with clarity and firmness. If you are vague and easygoing about your terms, it's more likely that people you deal with will be vague and easygoing about paying you.

It's important to develop a set of reasonable terms and condition and it's important to make them part of your sales contract.

A world of advice: If you don't actually tell them your terms, you cannot assume that they understand or accept your terms. You cannot assume that the other person is a deadbeat just because the bill wasn't paid on time. The truth is that many disputes and late payment situations arise through simple misunderstandings.

One more thing. Remember to explain your terms and conditions to your own employees. It's a common mistake to assume that your own people are well informed about how you conduct business.

The Fifth Rule: Don't Be Afraid to Escalate
If you find yourself with a collection problem on your hands, the important thing is to get control as fast as possible and keep pushing for results.

The key is to recognize when the process is stalled, and be prepared to use a stronger approach each time you make contact. If you are using the "Twenty Day Diary" (see second rule), you should know after the first or second call whether or not you have a problem. At that point, the receivables is still just a few days overdue, and you already know your customer's intentions.

If you believe they intend to pay, you can make an arrangement that will satisfy both parties. (Remember to confirm it in writing).

If you believe they will not pay, escalate your actions. Without hesitation.

There are many things you can do to apply increased levels of pressure, ranging from pre-collection letters and demanding notices to full-scale personalized collections and ultimately, legal action.

As you go through the process, remember this: It's your money. And sometimes you don't get paid if you don't push.

The Sixth Rule: Say What you Mean and Mean What you Say
We have already said that in order to prevent problems, it's important to set terms and stick to them (the Fourth Rule). The Sixth Rule extends that thinking to situations where a problem already exists and your trying to collect.

During the process of making a collection, you should use the call to:
1. Push for a resolution (you get paid) or
2. Establish the next steps to be taken (call back, send a courier to get a check, repossession, legal action, ect.)

To keep your control, you must keep your word. If you say you are going to call back for an answer or a response at 2:00pm on Tuesday, do it. If you tell a debtor that you are going to cut off their credit, do it. If you tell them that the matter is going to a professional collector, send it.

If you keep your word, and do exactly what you promise, you will always have the upper hand, and you will have a better chance of collecting.

The Seventh Rule: Don't Go Swimming Alone
It is understandable that some people are reluctant to make collection calls. After all, discussions of money can be uncomfortable and nerve-wracking. The "buddy system" is your best defense. The key is to plan your call, and then, if you get nervous, find a buddy and rehearse it. Take a few minutes with a co-worker, organize your facts, discuss what you might want to say, and, most importantly, decide what you want to achieve with the call.

Make a list of objections you might hear, and determine how you will handle them. For example, what if the person you are trying to collect from responds with the classic line, "the check is in the mail"? Most people will feel relieved and say " Great! Thank you very much: and end the call. Big mistake. Your response should be:
• When was the check mailed?
• What was the check number?
• What was the amount on the check?
• Who was the check mailed to?

Keep in mind that your collection won't succeed if you allow yourself to get stalled. So, when it happens, call in for reinforcements. Use the resources available to you.

For more information, please send us a message. Or, if you prefer, in the United States
you may call 1-800-333-6497.