Cash Collection -
from Receivables to Cash
Your turnover is fine, your margin is ok, business runs well - but:
you have a lack of cash on your accounts. Here an approach, how
cash should be collected.
Efficient handling of receivables ensures the continuity in the loan- and
collection process. Hence, it ensures the survival of a company. Basic
requirement for this is the introduction of a credit- and collection
management policy. Doing this right, it is the central liquidity pillar of
every corporate.
After all of these shortfalls of companies, one
could say, bankruptcy of groups which occurred
in the past years throughout nearly all sectors
and which will propably also remain in the future
it is unfortunately a matter of fact that most
suppliers which grant their customers credit did not take their lessons
by loosing money. Turnover and margin is the one, but being able to
buy bread and butter for the own company needs cash.
Survey of leading audit firms show that almost fifty percent of all asked
companies have no formal guideline which is reponsible for the
management and the collection of receivables. The other fifty percent
which have such a guideline do not live or just poor these very
important clear defined processes. More than a half of it have no goals
and the others do not follow up the goals. That the 50% which handle
their money careless had no larger damage is actually more luck than
anything else.
Strategy
A well elaborated strategy
is basis for a working
guideline for the
managament and
collection of receivables.
They should reflect the long
time focus and describve the tenor and reason of the accounts
receivables department. The strategy should als make clear the
philosophy under wich the accounts receivable department manage
their tasks by defining a basic codex of behaviour. Of course, this
philosophy is coherent to the principle philosophy of the enterprise and
shall this make very clear.
Requirements
In line with the budet process the goals for the next year regarding
collecting cash should be always reviewed and if necessary, also
renewed. These goals are consistent with the current and predicted
general market situation as well as the overall company strategy.
Known goals are the Days sales Outstanding (DSO), an effektivity
index, an analysis of the short-fall for recievavbles relatively to the
turnover.
Hint: also read this artice
Analysis, Reporting
In order to convert the benchmarks efficient and to adapt it under
circumstances it needs targets to achieve these requirements. These
targets need to be continiously measured and monitored. To check
whether your company is in line with your operating sector you can
check it in specialised research organisations, e.g. Dun & Bradstreet.
All targets and breadowns of actual-figures should be reported at least
once per quarter to a superior committee. An efficient way to present
the results is a graphic analysis. For instance, this could be a
segmentation of the receivable portfolio by outstanding receivables,
operating segment or geographical region. This report can in the
followin be analysed with the above mentioned benchmarks. This way
single divisions can be compared straightforward because a analyis
with only figures often do not show results clear enough.
Each analysis should also have contain a measurement with
respective consequences.
Responsibilities
The above mentioned guideline about receivables management need
also to have a clear process description about allocation of the
responsibilities. Thus, to avoid redundancies and to increase the
productivity and quality. Every single process step need to be
described. This ensures that in case of change of the responsible
manager the important know how is not going to be lost. Overall the
accounts receivable resp. payable departments, depending on the size
of the company, have a specialized company-credit-manager, a
regional credit manager, a receivables specialist, a credit-analyis
manager, an investigator, a trouble-shooter and a usual manager.
The Credit Process
A critical path is the determination of individual credit-limits, which
every customer should have. This process need to described very
carefully and by every detail. In case of errors in this process, serious
consequences have an impact to the company. We made very good
experience with a credit limit process as described in our artice about
measuring credit-risk.
During the lifetime of a customer relationship his reliabilty may change.
Therefore it is necessary to establish a periodic review due to respect
eventual changes, positive and negative ones. Also this need to part in
the guideline. A higher risk need to lead for a tighter receivable
portfolio, otherwise the overall risk increases without corresponding
earnings. We define fair revenues as the amount with which the
correspondent earnings can be realized per risk-level as defined in the
risk-strategy.
The Collecting Process
The oldest part resp. the one with most experience of the receivable-
resp. creditportfolio requires the same well defined management for
requirements and goals for the accounts receivable department as it is
the latest new part. In round terms defined process cycles of important
collecting processes (e.g. at what point customers are urged to pay,
prosecuted or distrained, how often the receivables are checked)
ensure continuity of the accounts receivable departemnt and follow up
of given targets. This section of the guideline should contain
informations about customers in a sense of “when is the customer to
be contacted, when is his credit limit with you to be locked (very
delicate), who is responsible to negotiate with the customers, if and
how many receivables shall be sold further and when is a receivable to
be depreciated.
Influence into the the Sales-Process
It is important that the above mentioned questions should be part of
the agreement with the customer and his reliability. That means, a
credit limit need to be set which have to agreed with the sales staff. An
important point are the payment terms and corresponding
consquences if the target is not achieved. For example reminding fee,
debit interest up until the locking of the account what means, that the
customer has to pre pay.
These first internal negotiations require good teamwork, to step up to
the other in line with the agreed strategy and if necesseary, influence
by the management board.
Summary
A credit- and receivables guideline back up a structured
environment in your company and has a probably high impertant key-
role, because it is responsible for the ultimate survival of your most
important assets, i.e. your receivables. Such a guideline lives and
changes in line with a companies strategy. The guideline is the tool
with which you save the solvency of your organisation and is therefore
the instrument what ensures all-time the liquidity. That means, it is
responsible for the air to be breathed, while the profit is the
food. Both together is necessary to survive, but without air the life is
ending after about 1 minute, while to survive without food is possible
for about two weeks.
Contact us, we would be glad to show you the possible
opportunities!