Magazine article Business Credit

Why Your Accounts Receivable May Be Too High and What You Can Do about It

Magazine article Business Credit

Why Your Accounts Receivable May Be Too High and What You Can Do about It

Article excerpt

The chief financial officer must keep an eye on receivables. Receivables are a reservoir of money that could be converted into profit, can be lost forever, or can cost far too much to manage or to recover.

But, beyond the obvious financial impacts, excessive receivables can both highlight and mask an insidious series of conditions that affect the health and growth of the business.

The sales department may be at odds with the credit department. They often are. Sales wants to meet or exceed quotas, win out over competitors who may be offering easy terms, and keep sales people happy by offering attractive compensation that even questionable sales will provide. On the other hand, the credit department doesn't want to be accused of allowing sales to be made that later cause collection problems. They may be somewhat arbitrary in their decisions about business they will accept or reject.

When the policies for payment from customers or clients aren't crystal clear, aren't in writing, aren't supported by top management, and are not communicated consistently to all customers, as well as to all of the appropriate people within the business, you can expect irritation by customers and confusion within the organization - both of which will hurt the business or reduce profits.

Why the Problem Persists

The single biggest reason for excessive accounts receivable is the fear of loss, which is the very plausible feeling that if the business spelled out the consequences for not complying, clearly and prior to doing business, customers might become upset and take their business elsewhere. Put another way, management will expect to be paid, in full, and on time for their product or service, but they will not want to be seen as hard-nosed about money or to be accused of that by customers who prefer the easiest payment terms possible.

There is, in brief, a real, deep-seated psychological conflict in the minds of most top management regarding payment policies. Brain power is no refuge against this conflict, which is why some of the brightest professionals in business have the worst problems in this area, specifically doctors, attorneys, accountants and bankers. The reason that intelligence is of limited value in understanding and correcting the causes of less effective policies and procedures in accounts receivable management is that emotions play an equally powerful role.

Here's an excellent example of why logic gets you only so far. The average business in the United States holds on to unpaid accounts an average of nine to 10 months before writing them off or turning them over to a third party for collection. Of course, many businesses do better, and all do varying amounts of work on the accounts before they get to the "bite the bullet" stage. However, I hope you would agree that any business could know or should know where they stood with almost all their accounts within three to four months. The difference of six months (on average) represents the incomplete integration of the rational with the emotional in defining payment policy and implementing procedures.

If this explanation makes sense, you probably have the policy you want. If it doesn't, or if you haven't put your understanding into practice, we have some work to do. To put the situation bluntly, you cause your collection problems, not your customers! The good news is that because you are the cause, you have the power to change things. Granted, this will be easier with new customers than with established ones. Still, there are excellent ways of educating current customers to a clearer way of doing business.

In business, you will win more by being willing to lose a few. The ones you lose are those customers you are better off without. As your payment policies and implementing procedures become clearer, you will actually build the business faster and better. Mixed messages will be gone, The rules of the game will be made clear prior to doing business, which makes sense. …

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