It’s very likely you’re experiencing a cash squeeze during these tough economic times. One area that’s bound to be on the rise is your accounts receivables. This is a double whammy if sales are falling at the same time.
I learned a lot about keeping accounts receivables at a manageable level with my first real paying job working at my family’s company. I was the assistant credit manager. Lucky me!
I was painfully shy already and now I was stuck at what I felt was the worst possible job - with one exception. That job would be the credit manager.
Why was I stuck in the credit department anyway? It was all part of my dad’s master plan. He wanted me to learn how to sell. That’s right … sell. I asked how working in the credit department could help me sell. He explained it takes great sales skills to ask customers for money and not lose their business.
He was right!
I did learn how to ask good questions, to mind my tone when I spoke, to be friendly and to work together with our customers to come to a successful solution for all. And speaking over the phone vs. having to face someone was actually a good transition on learning the key sales skills, one of which is listening.
The credit manager was a great mentor to me. He asked me one day how many of our customers owed us money more than 60 days. I would spend all day looking at reports but not really seeing it all, so I said 50%. The answer was less than 5%.
He then asked me how much bad debt do we have to write off each year. Again, I knew all those bad credit cases that seemed hopeless, so I said 10%. In fact, he told me it was less than 1%; industry guidelines at the time said this was conservative for fast-growing companies such as ours.
How did I have such a distorted view? I never tried his technique, which is to step back and see the forest for the trees with fact vs. gut feelings.
Replace feelings with factHow much do you have in outstanding AR and from whom? These are the people you need to work with to reduce your rising accounts receivables. Here are six tips to go about lowering your AR:
1. Separate the money owed that is overdue 60 days or more. Then ask why that’s the case. What do you need to change at your company to minimize this?
2. It’s not a sold job unless a proposal is signed with multiple installment payments based on objective things such as “rip out” or “rough in.” Always get a deposit. For example: 30% on signing, 30% on rip out, 30% on delivery of new equipment, 10% on testing and permits.
3. Retrain some existing customers to pay at the time the work is done. Below is a message clients have used to get this change in place. The CSRs were trained to repeat this message when booking calls:
“To keep our costs down and to be able to deliver on the promises we make, we require a signed proposal, which protects you, and a X% deposit to reserve a date on our install calendar.”
4. Find out who owes you money that’s more than 60 days overdue. Then determine if it’s because:
- You messed up and they’re not satisfied.
- Outstanding work needs to be completed.
- They are truly tight for money.
Then, decide how many cents on the dollar you’d be willing to take to get cash in and get it off the books. Remember, real money in is better than money on the books.
Face-to-face interaction is more effective at collecting money than a letter or a phone call. You can do all three but nothing replaces face-to-face contact. Plus, it’s a chance to impress upon your customers about the liens you may have or their voiding of warranties. Make sure to do this in the nicest way possible as you also introduce the notion of taking cents on the dollar if it’s done quickly.
5. The acting credit manager, typically the owner, should be at the weekly meeting for install sales with the system engineers (that’s my name for salespeople) to report where the company is on outstanding money and for all to discuss what steps may be required to obtain those funds.
6. Post the amount of outstanding accounts receivables on a whiteboard for everyone to see and make it everyone’s problem. Then, celebrate the wins as your team brings the number down.
With a couple of habit changes, you can reduce your AR to a more manageable cost of business and put more money to work at your company today!