As Western Machine & Chrome's customer list grew in size and complexity, the company found it had to act fast to develop a report that would make bill collecting simple
Back in 1989 Alvin Bennett, president of Western Machine & Chrome Inc., a small machine shop in Albany, Oreg., started an aggressive expansion of his company's customer base. In only six months he'd reached beyond the cyclical business of lumber companies, adding utilities, auto-parts suppliers, and cutlery manufacturers to the client list. But collection problems put that expansion at risk: overdue accounts stretched out 90 to 120 days. Bennett saw the need to rehabilitate Western Machine's accounts-receivable systems to accommodate his customers' diversity.
While many CEOs have only the dimmest interest in how their collection systems work, Bennett has long realized that getting paid is not a passive business function. He and his bookkeeper evaluated each of the company's customers, and the result of their disciplined consideration is a system that acknowledges the payment peculiarities of every client.
"We were nearly broadsided by credit complications," recalls JoAnne Wheeler, Western Machine's bookkeeper. Wheeler, who had come to her post in 1989, gradually realized that the problem was not Western Machine's new customers -- it was the old collection system. "We had started out with a handwritten report that I compiled twice a month on a five-column pad," she recalls. "Then, as we got more customers, we switched to a computer system. It was better at tracking details, but it just gave me 15 or 16 pages of information that was very difficult to prioritize."
Over the next two years Wheeler tried to refine her collection efforts -- even using index cards, one per client. "Updating them took time, and they kept getting lost."
No wonder: the client list had grown to some 300 companies, municipalities, and even farmers. Some received shipments three times a week. "Each time we shipped, we sent an invoice," Wheeler says. "So a typical client might have seven or eight invoices outstanding."
Finally, Wheeler initiated a system -- one buttressed by her experience managing accounts receivable.
"Most accounts-receivable reports," she notes, "provide either too little information to be useful or too much to be usable. We do business with so many different kinds of customers, in five states, and we need to be able to see which bills deserve our immediate attention." It was nearly impossible to focus on the most critical accounts when Western Machine's collection efforts were directed by its database. Wheeler recalls, "I'd start at the first line on page one and work through to the end with no way to flag the information I knew could represent problems."
The new reports waste few words and little space. There's one for every industry, and each highlights in 11 columns the key details for monitoring invoices. Coverage ranges from the age of each bill and the credit-security arrangement that backs up its payment, to a summary of the collection activities, and the initials of the staff person responsible.
A bottom-line calculation indicates which invoices are most significant to cash flow. That's what gives the system its strategic advantage. It helps staff members manage their time by getting them to ask the right questions: "Which overdue invoices represent the biggest cash-flow problems for us? Where are we at the greatest risk of not getting paid? When is an aging bill not really a problem?"
Wheeler spends several hours a week preparing the forms with current data. "The better organized our forms are, the more effective our collection efforts can be."
CEO Bennett is more than satisfied. "I always know who owes what and what's being done about it, without having to be directly involved." And, Wheeler adds, "in six months we've cut the time it takes to collect by about 10%."
JoAnne Wheeler explains how the system works:* * *
This report is a sample of the type that my assistants -- two full-timers and one part-timer -- and I use. I've designed it specially to make it easy for each clerk to keep track of his or her collection responsibilities. It also helps me evaluate each person's collection performance. There's a second type of report that I compile to keep the rest of our employees aware of every overdue account.
[The sample] page covers only our lumber clients. We follow different collection strategies with each sector. With municipalities, for example, we concentrate on making sure our paperwork is in order. We don't hound government agencies. They'll pay eventually -- we just don't know when. But we aggressively pursue overdue lumber accounts, concentrating on the biggest amounts first because those have the largest effect on our cash flow. Farmers' invoices are generally smaller, so we go after the oldest bills first. They're the toughest to collect.
I don't alphabetize client names or list them numerically. I list customers with the largest and oldest outstanding balances at the top of each page, and those with the smallest and newest unpaid bills at the bottom. There's no confusion about which ones are most important to keep after.
It really pays to stay on top of your interest charges, and every month I mail our late payers separate invoices for interest fees. Collection clerks sometimes want to offer an incentive to get a very old bill paid. They can use the interest assessment listed on the form to help make a deal. And, if a case goes to court, we have complete records of our activities to support our claim.
Totals and Percentages
Calculating the dollar totals and the percentages is the most time-consuming part of preparing the forms every week, but it's so valuable. It reminds us that credit and collections are an aggregate issue. We have to keep track of the larger picture, even while we're pursuing individual accounts. These figures provide a fast and easy measure of improvement.
I wish we had more room to record a description of the last action, because there are often so many details to keep track of. But to expand this column, I would have had to switch to a larger piece of paper, instead of using one that's 8Â½ by 11 inches, and that would have taken up too much desk space and been more difficult to manage. So we simply use the back of the form when our follow-up activities get complicated.
An effective accounts-receivable form reports the good as well as the bad. We include the security-indicators column to show clerks which accounts have an additional measure of security, such as a personal guarantee, a letter of credit, a standby letter of credit, or collateral. I flag an unusually good relationship with a company's accounts-payable clerks, too. If we have no reason to worry about a particular bill, that helps our clerks decide whether to devote their collection efforts elsewhere.
I've devised a code to highlight possible danger signs. These are the problem indicators: P stands for past problems. I indicates invoices paid out of order. B means broke agreement. C is changes in payment practices. M indicates changes in major management or other critical personnel. L, the biggie, means total due is at or exceeds credit limit. These codes tell us which bills are crucial for us to collect quickly.
No accounts-receivable clerk wants the recognition of having the worst or the most outstanding accounts!
Most accounts-receivable forms list this number on the right side of the page, but I'm convinced that people pay the most attention to details listed on the left. So I emphasize the total due and the oldest invoices. If the "current" column gets overlooked, because of its position on the page, that's much less worrisome than if the "over 120 days" number gets skipped.