Posts Tagged ‘accounts receivable’

5 Signs Your Business is in Trouble

May 3, 2011

by Doug Smith, President, The Woodhaven Group, LLC

Here are 5 critical early stage signs that your company may be in trouble.  They all have to do with poor cash flow. If you are experiencing 1 or more of these,  as owner or CEO, you must act immediately:

  1. Vendors are reducing your credit limit:  This may be due to failure to pay on time, a poor credit report, reduction in the amount ordered or simply rumors about your company from other suppliers.  Are they asking for payment before they will ship the next order to you?
  2. Top people leaving for other companies:  When a company is in trouble the weakest performers will be the last to leave.  The top people will notice problems and find reasons to change companies.  Be concerned if this starts happening as the top people in your company will be talking to each other.
  3. Your accounts receivable balance is increasing:  This is the cash your company needs to live on.  If sales are not increasing but the accounts receivable balance is going up then you need to find out why and fix it.  Are there quality problems?  Are invoices not being mailed on time?  Do you have a couple large customers in financial trouble?  Is anyone assigned to work slow payers?
  4. Inventory and accounts payable are increasing but sales are down:  Is someone ordering inventory as if there is a big sales increase occurring?  Who is approving purchase orders?  Get with key suppliers and see if you can return inventory and get a credit off the next invoice.
  5. Gross margin is dropping:  This is cash not available for the company to use.  Is there a quality problem requiring replenishment of goods sold?  Was there a price increase from a supplier that was not passed on?  Is the sales department giving price breaks just to get orders?  Are competitors offering a better product and sales is cutting price to compete?

Management must maintain a dashboard of key indicators that are monitored daily or weekly.  This will allow the management team to identify problems early on and take action.

Use A Collection Attorney For Delinquent Accounts Receivable

May 11, 2010

by Doug Smith, President, The Woodhaven Group

You performed the service for your new customer as spelled out in your contract.  Your management team even did a few things at no charge to make sure this client was happy.

Now it is time for this customer to fulfill their obligation and pay the invoice in full.  Instead, no payment as agreed.  Promises to pay are not kept.  There appears to be no attempt on your customer’s part to work out a reasonable solution.

It is now 60 days beyond the final due date.  Your company deserves the cash from this customer.  You have made sure to pay all the bills in full allocated to this project.

The new question now becomes, do you send this account to a collection agency or to a collection attorney?  There is no hard and fast rule but I know which I prefer.  I will take a good collection attorney every time.

First, I assume the collection is not small which qualifies for small claims court.  Once I have determined that then here are the thoughts that guide me to using a collection attorney:

  1. Without question a letter from an attorney’s letterhead carries  more weight and stands out from the run of the mill collection agency form letters the deadbeat client is probably already receiving.  My attorney’s letter will move to the top of the heap.
  2. If the situation eventually does go to trial then I have had the same person on the account from the start.  There is no hand off from a collection agency.
  3. In my opinion, a good seasoned collection attorney should have more experience and insight into the process of collecting from an account than a  just hired account manager at a collection agency.  My experience has shown that good collection attorneys come across as professional and better able to structure a solution that works for everyone.  However, a good attorney can also go win in court if it becomes necessary.
  4. I have always felt comfortable knowing that with a collection attorney I have someone who knows the law and would not do anything to jeopardize his standing in the local legal community.  In otherwards, there are no legal or ethical shortcuts I need to worry about.
  5. By giving the attorney all of my delinquent accounts he will be committed to seeing every delinquent account through to resolution.

I have heard the one downside to using a collection attorney is that it costs more than using a collection agency.

I personally have not found that to be the case.  Instead, I believe the attorney collects more money more efficiently.  Some attorneys charge by the hour and some by the hour plus a percentage of dollars collected.  I have negotiated a straight percentage (30%) and due to the steady volume given the attorney it has worked well for both sides.  Sometimes one letter collects the full amount and other times he has to go to court. 

Some businesses prefer using a collection agency.  That is ok.

But for me a good collection attorney was like a valuable member of my management team.  Why?

Because he delivered the cash!

Network Upfront To Increase Cash Flow From Accounts Receivable

April 23, 2010

by Doug Smith, President, The Woodhaven Group

Great news!  Your company just landed that big account everyone had been pursuing for over a year.  You took it away from a major competitor.  Sales and marketing is talking about the importance of networking and relationship marketing.  The sales manager has visions of bonuses yet to come.  The head of the company (is that you?) holds an all company meeting to announce the victory.  Someone puts the new client’s CEO on a Christmas list to receive that special cheesecake that goes to top customers only.  Well, good for you.

I’m sure everyone throughout the company will make sure the product or  service is delivered as promised and on time.

There is one important point to keep in mind.  The new relationship is not truly culminated until you are paid for all the things you are going to do for this new client.

Here is where a bit of networking and relationship building needs to occur that usually never happens.  I suggest that before the ink is dry on the new agreement that your company’s accounts receivable manager has a friendly one on one kick off conversation with the accounts payable manager of your new client.  If possible a personal meeting would  be better.  At this meeting it is important to identify all the key points for both sides that will assure that  invoices will be processed and paid as expected. 

 Topics that should be addressed:

  1. When will the invoice be sent.
  2. How will the invoice be delivered.
  3. Who the invoice should be sent to.
  4. What is on the invoice:  Example:  purchase order number, invoice number, date of invoice, quantity, individual pricing or progress payments, terms including due date, late fees, discounts for early payment.
  5. Review the monthly statement you will send and encourage them to reconcile it.
  6. How the payment will be made:  by check, ACH, wire, credit card, other.
  7. Who to call when there are questions or mistakes on the invoice or payment.
  8. What is the internal process for getting an invoice approved and paid at your client.  Is there a time lag?  Who has to approve payment? Are there any documents that need to be included? How can the process be expedited?
  9. Expectations of on time payment.

All of the above creates discipline between the two companies in the invoicing and payment process.  More importantly, a personal “real person” relationship has been developed early in the engagement before any problems occur.  This will make it much easier to remedy any glitches or situations that may come up since there is now a face with a name on the other end.

It would not hurt to periodically call the accounts payable manager and thank them for being an easy customer to do business with.  Nurture and maintain the relationship at this level as business grows  between the two companies.

There is one other benefit that will come out of this.  If your client finds themselves struggling sometime in the future, payments to their vendors may slow up.  Don’t be surprised if due to your close relationship that your company is kept current while others find payments being delayed.

All of this helps assure that cash keeps flowing into your company so more money can be invested in marketing to bring in other big clients like this one.

And about that  cheesecake for their CEO.  It might be nice to send the accounts payable manager at least a box of cookies.

Prioritize Accounts Receivable Collection As Interest Rates Rise

April 12, 2010

by Doug Smith, President, The Woodhaven Group 

A smart business person must have a successful cash flow strategy that is proactive and anticipates the impact on consumers and businesses from changes in the economy.

We are in the midst of rising interest rates taking place for homes, credit cards, and autos.  Combine these 3 critical areas with the fact that household debt continues to exceed household disposable income and that could be a formula for a potential decline in consumer spending.

If consumers have to pay off high existing debt with increasing interest rate levels it could slow up the purchases of consumer goods, both small and big ticket. The result would be a drop in revenue at businesses and a decline in their cash flow.  You could end up seeing your accounts receivable balances increase as your customers find it difficult to pay your invoices.

Don’t let this happen.  Have a strategy in place to collect your accounts receivable and keep the total balance outstanding  in line.  Do the following:

  1. Understand that as a company your employees and shareholders deserve to be paid on time for their efforts.  You put out a quality product and you stand behind it. 
  2. Assign a key manager to track accounts receivable balances and make that person accountable for making sure balances and aging do not get out of line.  Notice I said a manager and not a clerk.
  3. At a minimum you as owner or senior manager must see an accounts receivable aging report each week to see which customers are not paying on time.  Better yet, have a preset weekly meeting with the manager responsible for accounts receivable and come out of the meeting with action steps that need to be taken. Review the results at the next week’s meeting.
  4. Make it a practice to contact any key customer by phone immediately when an invoice is not paid on time. Follow up with a note.  This may sound drastic but if your customer knows to expect the call they will make sure you get paid on time. You may even have to make the call your self.
  5. Don’t let any one customer become too high a % of your overall revenue.  In my opinion, be careful if one client goes over 30% of your total revenue.  If they have financial trouble so could you.
  6. Have late payment fees and late interest charges and use them when you are not paid on time.
  7. Have a good collection agency or collection attorney in place to follow up on seriously delinquent clients.
  8. Whatever you do, get your invoices sent on time— best to have them arrive the same time as your shipment.

There are other suggestions for collecting accounts receivable that I will cover in future posts, but just make sure collecting accounts receivable is a major priority of your management team.  

Don’t be your customer’s bank!

It is your cash and you deserve to have it working for you—- not someone else. 

I would be interested in hearing what strategies you use to collect accounts receivable.