ACCOUNTS RECEIVEABLE-Week 3.pdf

ACCOUNTS RECEIVEABLE WEEK 3 ACCOUNTS RECEIVABLE ISSUES For many companies, the accounts receivable portfolio is its largest asset. Thus, it deserves special care and attention. Effective handling of the portfolio can add to the bottom line, while neglect can cost companies in unsee...

ACCOUNTS RECEIVEABLE WEEK 3 ACCOUNTS RECEIVABLE ISSUES For many companies, the accounts receivable portfolio is its largest asset. Thus, it deserves special care and attention. Effective handling of the portfolio can add to the bottom line, while neglect can cost companies in unseen losses. Here’s a roundup of some of the tactics that have been collected from the best credit managers to squeeze every last cent out of their accounts receivable portfolio: Have invoices printed and mailed as quickly as possible. Most customers start the clock ticking when the invoice arrives in their offices. The sooner you can get the invoice to them, the sooner they will pay you. Look for ways to improve invoice accuracy without delaying the mail date. Offer more stringent terms where appropriate in your annual credit reviews and with new customers. Consider whether shorter terms might be better for your company. With customers who have a history of paying late, begin your collection efforts before the due date. Call to inquire whether they have the invoice and if everything is in order. Resolve any problems quickly at this point. ACCOUNTS RECEIVABLE ISSUES If you have been giving a grace period to those taking discounts after the discount period, reduce or eliminate it. Resolve all discrepancies quickly so payment can be made promptly. If a customer indicates it has a problem with part of an invoice, authorize partial payments. Keep a log of customer problems and analyze it once a month to discover weaknesses in your procedures that cause these quandaries. Apply cash the same day the payment is received. Collectors can then spend their time with customers who have not paid rather than annoying ones who have already sent their payment. Review your own policies and procedures to determine if there are any areas that could be tweaked to improve cash flow. Then, when the call comes from executive quarters, you will be ready, and they will be hard pressed to find ways that you fell down on the job. DEALING WITH PURCHASE ORDERS AR professionals have learned to pay attention to the purchase orders that their companies receive. Specifically, they want to ensure that the purchase order accepted by the salesperson does not include clauses that will ultimately cause trouble for their companies, or even legal difficulties later on. Realistically, the salesperson should have caught the problem, but he or she rarely does. When the customer doesn’t pay due to one of these technicalities, it’s not the salesperson who will get blamed. To help avoid a purchase order disaster, AR professionals can take the following steps: 1. Simply read the purchase order. Vendors often slip clauses into purchase orders that you would never agree to. One favorite is to include a statement saying the seller will be paid as soon as its customer pays the buyer. This is a risk few companies are willing to tolerate. DEALING WITH PURCHASE ORDERS 2. Prioritize attachments. Typically, buyers write purchase orders that contain attachments. These include drawings, specifications, supplementary terms and conditions for work done on company premises, or safety rules for the supplier. When including attachments, it is recommended that one of them be a list of priorities to guard against any inconsistencies in the documents. The purchase order should “clearly reference all the attachments, and there should be a recitation as to which attachments are controlling over the others.” In the event of any inconsistency between or among these documents, the purchase order shall be controlling over any attachments, and the attachments shall be interpreted using the priority listed. DEALING WITH PURCHASE ORDERS 3. Take care when reference is made to a buyer’s documents in the purchase order. There are likely to be both helpful and harmful statements in those documents that reference the buyer’s material. The buyer may have printed its own terms and conditions on the back of a document. By referring to the document in the purchase order, you may inadvertently refer not only to the price, but also to terms and conditions, which may include warranty disclaimers and limitations of remedies that your company does not intend to give. Instead, the recommendation is not to refer to the buyer’s documents. Insist that the information is specified in the purchase order. If this is not practical, the following language might work: “Any reference to the purchaser’s quotation contained in this purchase order is a reference for convenience only, and no such reference shall be deemed to include any of the purchaser’s standard terms and conditions of sale. The seller expressly rejects anything in any of the buyer’s documents that is inconsistent with the seller’s standard terms and conditions.” Another favorite is to include terms and conditions on the back of the purchase order written in very small print and a pale (almost undecipherable) color. DEALING WITH PURCHASE ORDERS 4. Be careful of confirming purchase orders. Often, buyers will place orders via telephone, only to later confirm them with a written purchase order. In oral contracts, the buyer will often want the purchase order to be more than just an offer. Therefore, the buyer will try to show on the purchase order that it is a confirming purchase order and cement the oral contract made over the phone. More than one cunning purchaser has slipped terms into a confirming purchase order that were nothing like those agreed to orally. Don’t fall into the trap of assuming that the confirming purchase order confirms what was actually said on the phone. AR professionals who take these few extra steps with regard to purchase orders will limit their troubles. BAD-DEBT RESERVES Inevitably, no matter how good the credit professional, a company will have a customer that does not pay its debts. Most companies understand that bad debts are simply part of doing business and reserve for bad debts. In fact, many believe that a company with no bad debts is not doing a good job. The reason being that if the company loosened its credit terms slightly, the company would greatly increase its sales and, even after accounting for the bad debts, its profits. Thus, most companies plan for bad debt, monitor it, and periodically, depending on the company’s outlook, revise projections and credit policy to allow for an increase or decrease. For example, as the economy goes into a recession, most companies will experience an increase in bad debts if their credit policy remains static. So, in light of declining economic conditions, companies should either increase their bad-debt reserves or tighten the credit policy. Similarly, if the economy is improving, a company would take reverse actions, either decreasing the reserve for bad debts or loosening the credit policy. BAD-DEBT RESERVES Many companies take advantage of a favorable economy to expand their customer base. They might simultaneously increase the bad-debt reserve and loosen credit policy. Obviously, these decisions are typically made at a fairly high level. Other factors will also come into play in establishing a bad-debt reserve. Industry conditions are key and can often be quite different than the state of the economy. This is especially true when competition comes from foreign markets. There is no one set way to calculate the reserve for bad debts. Many simply take a percentage of sales or outstanding accounts receivable, or they make some other relatively uncomplicated calculation. HOW TO REDUCE YOUR BAD-DEBT WRITE-OFFS Most credit and collection professionals would love to be able to brag about having no bad-debt write-offs. Few can. While a goal of reducing the amount of bad debt write-offs to zero might be unrealistic in most industries, keeping that number as low as possible is something within the control of today’s credit managers. The following techniques will help you keep your numbers as low as possible: 1. Call early. Don’t wait until the account goes 30 or even 60 days past due before calling customers about late payments. Such delays can mean that, in the case of a financially unstable company, a second and perhaps even a third shipment will be made to a customer who ultimately will pay for naught. Some professionals even call a few days before the payment is due to ensure that everything is in order and the customer has everything it needs to make a timely payment. By beginning your calling campaign as early as possible, it is possible to uncover shaky situations. Even if payment is not received for the first delivery, future orders are not accepted, effectively reducing bad-debt write-offs. HOW TO REDUCE YOUR BAD-DEBT WRITE-OFFS 2. Communicate, communicate, communicate. Keep the dialogue open with everyone involved. This not only includes your customers, but the sales force as well. In many cases, they are in a better position than the credit manager to know when a customer is on thin ice. With good lines of communication between sales and credit, it is possible to avoid taking some of those orders that will ultimately have to be written off. 3. Follow up, follow up, follow up. Continual follow up with customers is important, whether you’re trying to collect on a timely basis or attempting to avoid a bad-debt write-off. If the customer knows you will call every few days or will be calling to track the status of promises made, it is much more likely to pay. This can also be the case of the squeaky wheel getting the grease, or in this case the money, when cash is tight. HOW TO REDUCE YOUR BAD-DEBT WRITE-OFFS 4. Systematize. Many collection professionals keep track of promises and deadlines by hand, on a pad or calendar. Items tend to fall through the cracks with this approach. Invest some money either in prepackaged software or in developing your own in-house, and the likelihood of losing track of customers diminishes. Some accounting programs have a tracking capability that many have not taken the time to learn. If your software has such a facility, use it. 5. Specialize. Set up a group of one or more individuals who do nothing but try to collect receivables that are overdue. By having experts on staff to handle such work, you will improve your collection rate and speed. 6. Credit hold. Putting customers on credit hold early in the picture will sometimes entice a payment from someone who really had no intention of paying you. This technique is particularly effective with customers who rely heavily on your product and would be hard put to get it elsewhere. Of course, if you sell something that many other vendors sell as well, putting a potentially good customer on hold could backfire. HOW TO REDUCE YOUR BAD-DEBT WRITE-OFFS While these techniques will not necessarily squeeze money from a bankrupt client, they will help you get as much as possible as soon as possible from as many of your customers as possible. This can be especially important in avoiding preference actions with clients who eventually do file. The quicker you get the clock ticking, the more likely you are to be able to avoid preference claims. ELECTRONIC PAYMENTS/AUTOMATED CLEARING HOUSE (ACH) One of the ways to improve DSO and reduce collection costs is to receive payments electronically. Traditionally, this was done through wire transfers and was only used for large dollar collections or from customers of questionable credit history (for payment in advance) as wire transfers are costly. However, there is another alternative that has been gaining favor. These are payments through the automated clearinghouse (ACH)—a mechanism most frequently associated with consumer transactions. The most common types of payments made through this mechanism are direct deposit of payroll and Social Insurance payments. These are examples of ACH credits. Some readers may have their mortgage payments or life insurance premiums automatically deducted from their bank accounts. These are examples of ACH debits. As companies look for ways to conduct business electronically, the low cost and ease of the ACH made it an ideal mechanism for those looking to pay their bills electronically. AUTOMATED CLEARINGHOUSE CREDITS AND DEBITS Automated clearinghouse credits are originated by the payor to move funds from the payor’s account to the receiver’s (payee’s) account. Automated clearinghouse credits must be preauthorized, though not necessarily in writing. Automated clearinghouse debits are originated by the payee to draw funds out of the receiver’s account and deposit them into the payee’s account. Debits must be preauthorized in writing by the receiver. HANDLING DEDUCTION ISSUES Not only do credit and collection professionals have to worry about collecting their company’s money, they also have to be concerned about collecting all of it. The two largest causes for short payment —and credit professionals’ migraines—are unearned discounts and unauthorized deductions. What Is an Unearned Discount? Many companies offer a small discount for those customers who pay their invoices early. Typically, a company selling on open account will offer 2/10 net 30. This gives customers the right to pay the full invoice amount 30 days after receiving the goods. However, if the payment is made after ten days, the customer can pay 98% of the invoice, thus saving 2%. While this may not seem like a big deal, it adds up and works out to a rate of return in excess of 36%. The problem occurs, over and over again, when the customer takes the discount and then doesn’t pay within the discount period. Now, if we were only talking about a few extra days, most companies would probably ignore the issue. However, unfortunately, a few extra days is rarely the problem. Many customers take the discount and pay at 30 or 35 or 45 days—or even longer. WHAT IS AN UNAUTHORIZED DEDUCTION? Unearned deductions cause even more headaches for credit and collection professionals than unearned discounts. At least with the discount issue it is fairly easy to calculate and analyze the problem. Unauthorized deductions are reductions customers make on their invoices for any one of dozens of valid or invalid reasons, including: Short shipment Damaged goods Missing documentation Not following retailers shipping instructions Freight charges Insurances charges Advertising allowances Rebates WHY HAVE UNAUTHORIZED DEDUCTIONS BECOME SUCH AN ISSUE? The best customers send along the remittance advice that explains what the deductions are for. However, many accounting systems do not have the capabilities to provide adequate detail or the customers don’t see the necessity of sending along the backup information. When the accounts receivable manager receives the payment, he or she then has to apply the payment. Since the payment doesn’t match any of the outstanding invoices, the accounts receivable professional then has a problem applying cash. WAYS TO ELIMINATE DEDUCTION PROBLEMS Ignore the first offense, send a warning with the second, and after that, bill back amounts and handle as any other invoice. Implement improved procedures for customer returns and make sure all customers are aware of both the new and existing procedures for returns. Personally visit the worst abusers to determine if there are any problems that should be resolved on your end. If not, make it clear that the unauthorized deductions and unearned discounts will not be allowed. DEALING WITH THE DEDUCTION PROBLEM What follows on the next few slides are quick tips from real life credit and collection professionals. Many can easily be included in the day-to-day operations of the credit department and will help better the problem. Eliminate the Problem In the best of all worlds, unauthorized deductions would be eliminated. While few credit and collection professionals have managed to achieve that goal, by aiming at it, some have come close. When a customer realizes that the credit and collection staff of its vendor is not going to allow it to take deductions without good cause, the number of deductions is likely to decrease with the customer only taking those that it feels it has a reasonable chance of being accepted. GENERAL DEDUCTION ADVICE The advice regarding the handling of customers who take unauthorized deductions and unearned discounts willy nilly is broken into several categories. Some of the suggestions, however, are more generalized and as such, are grouped together in the accompanying tips and techniques. General Tips Communicate your requirements to customers. To make this strategy truly effective, sales must be involved in the discussion. Implement a credit memo policy. Use stickers on invoices asking customers to call instead of just taking a deduction, which may be unauthorized. Put deductions into system for follow-up calls as with any other late payment. Use a third-party collection firm to collect these funds on your behalf. PREVENTING UNAUTHORIZED DEDUCTIONS Of course, the best way to get rid of unwanted deductions is to prevent them from occurring in the first place. While it may not seem possible to the uninitiated, as you will see from the following advice there are techniques that can be used to prevent the customer from taking deductions it is not entitled to. WAYS TO PREVENT DEDUCTION PROBLEMS Educate the sales force to resolve problems before the invoice is paid. If deductions or discounts are not collected, amounts are deducted from broker and sales budget. Make customers aware that unauthorized deductions and unearned discounts will not be allowed. When they realize you mean business, a good portion will stop taking them. The first time an unearned discount is taken, send a letter explaining the problem. Include a statement advising that if future unauthorized or unearned discounts are taken, the entire discount program will be placed in jeopardy. To avoid unauthorized deductions, verify that the purchase order matches your terms of sale. If it does not, send it back to the customer for corrections. When starting a policy of disallowing unearned discounts, call or send a letter. Leave the dollar amount of the discount outstanding WAYS TO RESOLVE DEDUCTION PROBLEMS As soon as a deduction is made, determine whether the deduction is valid. If not, immediately send the customer an email requesting reimbursement. Determine if there is one root cause for a large portion of deductions. When the reason is identified, it is possible to resolve the issue. Immediately phone the contact to resolve the dispute. If the first contact person refuses to resolve the matter, move up the ladder. Most who use this strategy report that going over the head of the recalcitrant contact changes the mood, and the contact becomes more cooperative on future encounters. Send a follow-up letter and form showing the dollar amount disallowed, the date of the check, along with a copy of the postmark on the envelope for each amount. Most customers will pay on receiving such documentation and stop taking unearned discounts in the future. Set up a customer-complaint system. Customers can call the customer service department with their complaint. An online complaint can be e-mailed to the responsible department and handled immediately to the satisfaction of both parties. Credits can be issued, where appropriate, before the deduction is taken. RESOLVING DEDUCTION ISSUES- STRATEGIES Rather than take the quick tip approach, some professionals will prefer to take a more thorough strategy. Some strategies that have worked for others in the field are: Rebill the customer immediately for the deduction. Include a copy of the group service agreement outlining the deduction policy with a request for payment within 15 days. If payment is not received, inform the customer that the agreement will be canceled. This approach requires backing from senior management. When a new account is set up, send a letter introducing the credit manager along with a copy of the policies and procedures. To establish a more personal relationship with the customer’s accounts payable manager, follow up with a phone call. RESOLVING DEDUCTION ISSUES- STRATEGIES Resolve complaints and discrepancies quickly. The sooner the issues are resolved, the faster the deductions will disappear, and the customer will learn that you will not tolerate unauthorized deductions. As soon as the deduction is identified, call the customer and request the backup paperwork. If it is provided, research it immediately, and get back to the customer. If it is not furnished, continue to call the customer to request the information. If all else fails, have the salesperson request the backup data. If the volume of unauthorized deductions is high, assign one staff member to chase down and collect this money. Within 48 hours of receiving a payment with an unauthorized deduction, advise the customer of the disallowed deduction and request immediate payment of the amount not approved. Empower the billing staff to review and follow-up on short-paid invoices to free the collections staff to pursue larger collection problems. RESOLVING DEDUCTION ISSUES- STRATEGIES Those who offer nonstandard terms often find that their customers calculate discounts incorrectly. Prepare a standard memo thanking the customer for the prompt payment. Then inform the customer that the discount was calculated incorrectly, and show the correct calculation. Not only does this approach bring in the money for the credit professional who uses it, but she says it also reduces the number of phone calls into the credit department. Work closely with the sales department. When customers take unauthorized deductions, force the credit department to work with sales to resolve the problems. The accounting manager who takes this approach reports double benefits: Her receivables aging improved, and the credit department enhanced its relationship with the sales force. Visit recalcitrant customers to explain the company’s policies regarding unauthorized deductions. This tactic works best if the company has a clear deduction policy to share with the customer. SUMMARY Many reading these suggestions will think that they involve too much effort given the amount of the deduction. On one level, they are correct. However, the goal is not only to collect money for the unauthorized deduction, but to change customers’ behavior. If they know you will chase the money, they may stop taking the deductions After all, the customer must do a lot of work as well. Deductions are a serious dilemma for the credit and collection professional. The problem shows no signs of abating. The best one can probably hope for is to try and keep the issue under control. This requires constant and steady effort and attention. Without that, the problem will mushroom, taking all a company’s profits with it.