Make collections a priority
A new customer you’ve been cultivating for some time finally places a custom order. The production team works diligently to meet the customer’s expectation as well as the order’s two-week deadline. The final product ships on time and the team members are congratulating each other on a job well done. But what’s missing?
Everyone was so preoccupied with completing the sale and producing the product that no one bothered to check the customer’s credit or collect a down payment. What’s more, a billing clerk had to chase down the sales rep and plant manager to get all the necessary information to accurately complete the invoice — which was mailed a month after delivery. Now, everyone’s attention has returned to making the next sale or batch of product, leaving no one to follow up on payment.
If this sounds familiar, you’re not alone. Scenarios like this play out in factories from coast to coast, costing them all big bucks in the long run.
Manufacturers need to take a hard look at their billing practices. Here are some collection process procedures to consider implementing:
Make collections everyone’s job. Every employee has a role in making sure the company gets paid. Salespeople must obtain accurate billing information from customers (phone numbers, email addresses and names of payables personnel), as well as request approval to perform credit checks. They also need to negotiate contract terms — such as early-bird discounts, late payment penalties and down payments on custom orders — that will help get money in the door faster. The owner or CFO should approve all new customers and terms before the accounting department sets them up in the system.
In addition, factory workers need to code jobs properly and notify the billing department when orders ship. In return office personnel must promptly submit invoices and follow up on unpaid accounts.
Make sure your workers understand their roles in realizing revenue. And give them adequate training and tools to get the job done efficiently.
Streamline the billing process. You can’t collect what you don’t bill. Set up formal procedures that trigger an invoice as soon as the delivery truck pulls away from your dock. Electronic billing systems allow companies to send invoices via email or text. Most e-billing systems also enable online payment and purchase orders, as well as automatic re-orders, if applicable.
Assign dedicated collection personnel. Dedicated representatives should be assigned to handle each customer’s billing issues. This encourages office staff members to develop a rapport with customers. They should monitor all new accounts closely at first and become more flexible as the relationship develops.
Manage overdue accounts. Someone, possibly your controller or finance officer, should be in charge of monitoring when payments are made. Each week, he or she should report to the owners about the percentage of receivables in the 0–30 days category, 31–60 days category, and beyond. Doing so allows you to detect and reverse negative patterns before they have a business impact.
Develop a timeline for acting on overdue accounts. For instance, after 45 days, you might call or send a reminder text to customers who haven’t responded after the first bill. By pursuing these accounts before too much time has passed, you send the message that the company intends to get paid but is willing to work with the customer to resolve payment-related questions or problems.
Provide performance incentives. Too often, incentives are based on revenues, not profits or cash flow. Consider structuring your incentive program based (at least partially) on collections. For example, offer a bonus to workers if the company has 50 percent or more of accounts receivable in the 0–30 days category or keeps bad debt write-offs below 5 percent.
Consider factoring. It takes time to rein in collections. If your company needs immediate access to cash, factoring can be a short-term solution. Here, your receivables are sold to a third-party collection agency, usually for 60 to 85 cents on the dollar. This may seem expensive, but it can provide instant cash and free up employees for implementing long-term collection improvements.
When all collection attempts fail
After repeated unsuccessful attempts at collection, you may eventually realize that a customer isn’t going to pay. When it’s time for a write-off, the Internal Revenue Code (IRC) offers a tax deduction for business bad debts that may soften the blow.
Under IRC Section 166, a business bad debt is a loss from the worthlessness of a debt that was created or acquired in your trade or business, or was closely related to your trade or business when it became partly or totally worthless. Most bad debts involve credit sales to customers for goods or services. But they can also include:
- Bona fide loans to customers or suppliers that are made for business reasons and have become uncollectible,
- Business-related guarantees of debts that have become worthless, and
- Debts attributable to an insolvent partner.
To qualify for the deduction, you must show that you’ve taken reasonable steps to collect the debt and there’s little likelihood it will be paid. You also must have previously included uncollectible credit sales in your accrual-basis gross income.
The best advice we can offer is, “don’t go it alone.” For sound business advice and high quality accounting services, contact John Troyer, CPA, Ciuni & Panichi, Inc. Partner, at firstname.lastname@example.org or 216-831-7171.
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