AR is Everyone's Business

If you are in the financial industry (Credit Card, Banking, etc.), chances are the credit & collection role is a major focus for your business. That’s because currency is your product. But what if you are in the manufacturing, servicing, or other industry? Chances are your company may be focused on top line sales, manufacturing productivity, quality, waste reduction, inventory, and research & development a little more than they are on working capital. Getting top management and other functional areas engaged in credit & collection issues can prove to be a daunting task.

Ongoing performance issues in accounts receivable are often rooted in internal processes, such as adhering to customer billing requirements, properly tracking customer returns, poor internal communication, or lack of standardization and automation. These problems usually occur when a business grows rapidly, and business systems and procedures do not keep up.

In some cases however, these problems can exist in businesses that are not experiencing growth, and are feeling the intense pressure to find it. The problem for the credit manager is that other business issues more directly related to new business, product performance, customer service, etc., dominate the meeting rooms. Meanwhile, receivables issues slowly pile up.

This is one of the most difficult situations to turn around for the credit department, because it involves making a change in other functional areas outside of the credit department. This means not only changing or creating new policy, but also infusing accounts receivable into these other functional areas, so that when business decisions are made, consideration is given to the impact that change will have on the company’s working capital. Businesses like to focus on the positive and forward thinking. More often than not, the perception of accounts receivable by most other functional areas is that it is negative, and focus is on the past.

The first step is to create a simple pareto chart. This will help you determine where your root causes are. To do this, just go through your aged trial balance to identify and categorize each invoice issue. Your classifications can include pricing, shipping, billing, or whatever is applicable to your business. Be sure to customize the categories to your specific business issues. Once you have them all categorized, record the total dollar value of each category, as well as the number of occurrences. Use this to create a visual chart to include in your monthly reporting to the department heads.

When it comes to reporting, numbers tend to blend together for the non-financial managers, but a visual aid can be a great way to get the reader’s attention. Next, use this information to determine the root cause of the repetitive issues. You may be surprised to find that many of them may stem from processes in other areas. Accounts receivable performance is typically a business issue, not just a department issue. Keep in mind that those responsible for collecting past due balances act as both negotiator, and facilitator. They negotiate with the customer on customer related issues, and act as facilitator on internal issues, drawing information from various groups, conducting conference calls, or leading improvement teams to resolve the customers complaint, thereby eliminating their excuse for non-payment. In the capacity of facilitator, you must engage all of the functional areas who’s processes and procedures (or lack thereof), are contributing to these repetitive issues.

Communication is key. Review your monthly receivables performance reporting and determine if the information being reported is being distributed to the correct audience. Every department head should be on distribution. Once you have that audience, you have to communicate clearly and concisely the ‘standard’ performance metrics. These metrics should include:

DSO
Compliance index (% current),
An aging summary, and
Top 10 list (hit list).

In addition, include an aging summary by sales rep accountability, collector productivity, the financial impact of the poor performing customers, and most importantly, how these issues tie into other functional groups such as sales, marketing, customer service, operations, and technical. Raise the awareness in these groups by showing them how their processes and procedures directly, or indirectly, impact accounts receivable performance. Anticipate what information they would ask for in order to resolve issues related to their specific job functions. All too often, gathering information from internal sources to resolve unpaid invoices can be more difficult than getting information from the customer. Remember, you are asking them to help you with something that has already been sold, invoiced, and probably shipped to the customer. They are being asked to look into something that has already done, something from the past, which tends to go against the forward thinking culture.

Effective education and communication with your other functional areas on how their workflow impacts accounts receivable will improve internal processes, and will create more of a teamwork environment. Best of all, the end result will be felt on the bottom line.

Reprinted with permission by Collection Advisor, www.collectionadvisor.com, 888/610-1144.

Darin Ball has been in the Credit/Collections business for over 10 years with experience in both 3rd-party collections and 1st-party collections, as well as credit. He is a member of the NACM (National Association of Credit Managers). He is currently the supervisor of Credit and Collections for Sonoco Flexible Packaging, and has responsibility for managing and leading the credit and collection efforts for 10 manufacturing facilities throughout the United States and Canada.