Although not a very exciting part of my work, good Accounts Receivable management can be an enormous advantage to your business. There can be a lot of cash tied up in uncollected invoices and better processes around collections can stop cash being an issue and start it being a cause for celebration.
People can’t believe that I could have reduced days sales outstanding (DSO) from 68 to 34 days at one employer over a period of 21 months, releasing $600k in cash to the business.
This was important at the time because the business was growing by 30-50% per year and money was need for new office space, new IT equipment for staff, and a substantial growth in business volume within growing WIP.
In a business where the customer terms are 30 days, it is very unusual to get the DSO down to 34 days. That means that almost every invoice is collected on the day due, with very few exceptions, disputes or delays.
How did we do it?
In my first role out of the profession, I had a very experienced credit manager working in my team. Wendell Rose had unbelievable collections metrics, a happy collections team, happy clients, and very few bad or doubtful debts. So I asked him how he did it – and I have used the same process within every business I have worked, ever since.
Passive vs Active collections management
In collections, you might wait until an invoice is overdue before chasing the customer for payment. This is what you might call passive collections - sitting back and waiting for the money to come in, at least in the first instance. Zero marks for initiative here.
Wendell said that instead, he would have his team call any customers with significant current invoices during the month, just to check that they had received a copy of the invoice, and that there were no issues with the product or service that they had received.
This is what I call active collections management. There is an action within the collections team which is preventative and not dependent on a problem. Quite the opposite – the action can help detect problems and have one of the sales or operations people get back to the client, to resolve any issue, before the invoice even goes overdue.
This is easier to do in an environment where you tend to have a limited number of major significant invoices from time to time, rather than a lot of small invoices. Or a mixture of both.
Now it must be said that some clients do not like getting called to discuss an invoice before the due date. But I have found that over time, members of my team are seen by clients as trouble-shooters. The offer to help rectify any issue can not be disputed as a constructive and generous move. Especially when issues are resolved promptly in response to any queries raised.
As proof of this, Wendell and his team used to get more Christmas cards and gifts from clients than just about anybody else in the business. As far as clients were concerned, he was great at helping them ensure that the deliverable was complete and their own management were happy that our goods and service issues were resolved promptly.
And he had such a lovely, disarming way of asking whether they were happy with the service, that opening the cheque book on time was always the least they could do...
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