Credit Info World

1. To standardize the receivable creation and collection processes, and thus minimize the possibility of errors.
2. To make you aware of potential problems as soon as they arise, so you can take quick action to correct the situation.

     Here’s how you accomplish these objectives:

     Reporting  ”You can’t manage what you don’t measure.”  This is an old adage, but never more true when talking about managing your receivables.  At a minimum, you need the following:

1. Cash Flow Projection Report, which should be prepared at least weekly, shows beginning cash, how much cash you expect to receive from receivable payments, how much cash you expect to pay vendors, and the ending balance.
2. Accounts Receivable Aging Report, which shows how current your customers are in paying their bills.  You must act quickly on accounts that fall into the 30 day category.  The longer someone takes to pay, the less likely it is that they will pay.
3. Accounts Receivable Turnover Report, which shows how long it actually takes you to collect your receivables.  You want to compare this number against historical turnover ratios.  When you do, the turnover ratio will indicate a collection problem if:
   • The turnover ratio is greater than the actual number of days you allow a customer to pay.
   • The turnover ratio increases as sales increase.
   
   
4. Bad Debt Loss Report that shows bad debt losses you have incurred by account size, customer and sales terms.  It is also helpful to review historical loss experience by customer type and product line.

     Most, if not all, of these reports, can be automatically produced by your accounting software.  They are standard items on the report menu.

     Processing  The longer it takes to create and collect the accounts receivable, the longer it will be before cash is in your bank account.  Therefore, you want to review the entire process with a goal of reducing the amount of time it takes to complete a task.  Here are some suggestions:

1. Create invoices as soon as the work is complete.  Do not batch up the receivables and process them only once a week or once a month.
2. Mail the invoices as soon as they are created and approved.
3. If you are providing services or products for a project that has a long time frame, invoice your customer at regular intervals instead of waiting for the project to be completed.
4. If possible, require your customer to make at least a partial payment before the work begins.

     A written credit policy is an excellent tool for managing cash flow and increasing sales.  However, like any tool, to be effective, it has to be used properly and constantly maintained or it loses its effectiveness.