* Be flexible. "My people try to collect every single dollar that's owed to us on time, but after a bill is 60 days overdue, we start looking for other ways to bring in cash," says Chuck Smith, vice-president and general manager of Trail Ford Tractor Co., a $3.7-million dealership in Lake Worth, Fla. "If someone tells us he can't pay the entire $500 he owes us all in one sum, then we'll ask, 'Can you pay us $400?' Or, 'Can you pay us $100 every two weeks?' We'll just keep breaking the bill down into smaller and smalller increments until it finally seems manageable to the customer." Most customers are so grateful for Smith's flexibility that they live up to the revised payment terms. "In the end," says Smith, "all we care about is bringing the money back into our business."
Well said. After all, getting paid is what accounts-receivable systems are all about.
MANAGING CASH FLOW
Collections work best when they're part of a plan
Puzzling, isn't it? When companies slow down their own payments to suppliers and other vendors, they're complimented for shrewd cash management and for maximizing their all-important cash flow. But when they're on the receiving end of slow payments, they're cursed with a cash-flow crunch.
What's a CEO to do?
In an ideal, altruistic universe, CEOs would pay their own bills just as swiftly as they hoped to receive payments, probably within a week or so. And indeed, if the whole business community reciprocated, company owners would flourish, thanks to all those funds pouring in that could finance growth activities. Odds are, plenty of bankers and lawyers would find themselves out of work.
Welcome to reality. So long as it remains better for companies to receive than to give, accounts receivable and accounts payable will always represent financial danger zones for entrepreneurs. Savvy CEOs need to aggressively manage both ends of their cash-flow cycles, to be certain that funds leave and enter the company's coffer at an optimal pace for both current operational needs and long-term growth plans. Here are some essential steps to take to protect your cash flow:
* Plan your own company's payment schedule. If a supplier offers an attractive financial incentive for early payment, take him up on it. Without such incentives, it makes sense to pay bills 30 to 45 days after receipt. That gives you the best of both worlds: time to earn some short-term interest on cash funds, but no risk of negative repercussions for your business (such as a blot on your credit rating, late-payment charges, or, worst of all, your suppliers insisting on cash on delivery).
* Figure out your break-even point for collections. For every company, there's a point at which sales become more costly than they're worth -- that should be absolutely the latest collection date targeted by your billing-and-collection system. To figure out your company's break-even point and plan accordingly, sit down with your chief financial officer and calculate the effect of collection and financing costs and the like on your company's profit margin.
* Pay attention to the human component of your cash-flow process. More so than with any other accounting system, successful billing and collection depend upon motivated, well-trained employees with plenty of support from the rest of your staff. Likewise, account-payable clerks can perform their jobs best when given strong directives from CEOs and CFOs about optimal ways to schedule the company's payments.
* Look for trends in accounts-receivable problems. Some customers experience their own seasonal cash-flow crunches or have difficulty paying bills larger than a certain amount. If you can identify those problems, you can take steps to safeguard your own finances against them -- perhaps by timing deliveries differently or occasionally imposing a finance charge on customers. The best way to track patterns: ask your accounts-receivable department to report on three to five years' worth of order and payment records for each month's late payers.
* Survey your customers and chief suppliers for ways to improve both ends of the cycle. If you're suffering from accounts-receivable problems, question your customers (especially late payers) about ways to revise your invoices that can give them the information they need, in a format they can understand. If you're looking for ways to reduce your own costs, check with your major suppliers to see if you can negotiate some early-payment discounts for stepped-up payments within 30 or even 15 days.
* Personally follow up on any problems. Things that seem at first glance to be collection problems on your customer's end may actually be the result of glitches in your own customer-service or record-keeping departments. Follow-up is also the best approach when it comes to resolving your own problems with services or products your company has bought: instead of simply withholding payment -- which can sock you with a credit penalty you don't deserve -- notify the company in writing and then stay in touch by telephone on a weekly or monthly basis, as appropriate.
* Safeguard your cash flow against fraud and error. Richard Rampell, a CPA in West Palm Beach, Fla., warns that many companies have only the loosest of procedures to handle bad-debt write-offs, which leaves them exposed to collusion between the members of their accounting staffs and delinquent customers. "Companies should set up formal mechanisms to control the points at which debts are either turned over to attorneys or collection agencies or written off -- none of which should be able to happen without the signed approval of the company's CEO or CFO," Rampell advises. He also recommends setting up an accounts-receivable control total to make sure that all changes have been credited properly and that they match. The total deposits on sales should agree with the total payments of the individual customers as they have been recorded on each of their accounts-receivable balances. These should be compared with the accounts-receivable control total monthly. It's a way to make sure that there have been neither careless mistakes nor thefts.
