Most veteran athletes will tell you, “It’s the legs that go first.” There are exceptions, of course — baseball pitchers’ rotator cuffs and related shoulder ailments come to mind — but the legs tend to be the first to show signs of wear and tear from the accumulated demands that sports activities place on them.
In business, it’s your accounts receivable. It often is the first part of the business to show signs of stress in an economic downturn.
Many businesses have to extend credit of some sort to their customers. Even restaurants, which are typically cash operations, sometimes find that certain portions of the businesses — catering, for example — involve doing things “on account.”
Web-based retail businesses are generally immune, but any business that deals with high-volume customers often ends up extending credit. It even happens in Vegas. The accounts receivable for our businesses often provides a clear and unmistakable signal as to what is going on in the economy.
An economic downturn, for example, usually shows up in business receivables long before economists realize what has been happening.
Whenever the level of economic activity changes — up or down — it often shows up in cash flows before it hits the bottom line.
Managing accounts receivable isn’t easy. Each account reflects a customer relationship, and money issues in that relationship can be as loaded with emotional content as they would be with family members.
Fortunately, there are some things to do that can make managing accounts receivable effective, although still not easy or always pleasant.
The first is to stay on top of things. Treat your accounts receivable as a “use it or lose it” asset, because that is exactly what it is. Like fresh produce or fresh fish, accounts receivable does not improve with age. Don’t wait for your receivables to decay and lose their value.
A good reporting system can be a big help in staying on top of things.
Most accounting systems these days have an “aged receivables” report of one sort or another, and these provide a very useful picture of what is owed to you by your customers and whether the amounts are current or overdue.
A “weighted-average maturity” report — which looks at the same data but gives more weight to larger accounts — is a good way to keep track of whether things are getting better or worse. It also is a single number, a kind of Dow Jones for receivables, and that makes it easy to remember and deal with.
The second thing that you need to do is to take positive action.
Start telephoning accounts as soon as they approach or exceed the terms agreed on. The first call should be a “reminder” in which you make sure that the customer knows that the invoice is now overdue and that you are taking an interest in it.
The third thing that you should do is to “personalize” the calls. Make sure that the conversation is long enough for the customer to remember your name, and make an effort to conduct it in a way that you seem like a friendly, polite, real person.
The goal of both steps two and three is to ensure your place in the “shuffle.”
When things tighten up in an economy, businesses — your customers — sometimes find themselves unable to pay all their bills on time, so out of the pile of invoices they will select the ones to pay. There are other criteria affecting the choice, of course, but a customer is more likely to select and pay your invoice if you have taken an interest in it. And if they feel that they know you personally, they will be less likely to disappoint you by delaying payment.
The fourth thing that you should do is tighten up your standards for record-keeping, especially in “proof of delivery” documentation. In accounts receivable, it can mean a lot of money for you. Your banker can certainly help you with this, as can your accountant.
But an even easier way to get some good advice is to contact a collection agency (there are lots of them; it’s a very competitive business) and contract with them to collect a few of your worst accounts. They will let you know right away if there are any weaknesses in your records, and tell you what is needed.
The fifth thing that you should do is get your sales force involved in the accounts receivable management process. Because of their customer knowledge, sales people often can be very helpful in getting payment on invoices.
When done well, accounts receivable management can make a big difference for any business, and that is especially important to remember as we navigate a turbulent economy.
James McCusker, a Bothell economist, educator and small-business consultant, writes “Your Business” in The Herald each Sunday. He can be reached by sending e-mail to otisrep@aol.com.
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