LUXA Accounting Articles

Bookkeeping Tips: 4 Simple Steps To Bring In The Dough

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Basic accounting best practices in credit and collections

In today’s business environment, the effectiveness of a company’s sales team is often viewed as the driving force of success or failure.  They are the rainmakers, a profit center that delivers revenue and enables a company to keep the bottom line in the black.  On the other end of the revenue cycle is the credit and collections team that is too often considered a necessary evil, a cost center, and an impediment to internal and external sales efforts.  In reality, credit and collections is an integral part of the sales team that helps manage customer relationships, completes the sales to cash cycle, and ensures a healthy cash flow.  

The need for effective credit and collections management becomes apparent when viewed in this light.  For small and mid-sized companies, it can be the difference between survival and extinction, as poor cash flow can doom even the most promising ventures.  To ensure that your company doesn’t become a cash flow casualty you must implement an appropriate credit and collections strategy, support it with effective tactics, remove barriers to customer payment, and leverage technology to the extent possible.


Defining Your Credit and Collections Strategy

While there is no one-size-fits-all strategy that works for every organization, there are common characteristics that can promote success:

  • Identify a single collections management authority to ensure consistency and accountability. If the team is receiving mixed messages from various higher-ups within the organization, they can easily lose focus on the common goal.

  • Devise a management oversight procedure to track performance based on measurable goals.  These metrics may vary from one company to another, but the end result is the same - collection of outstanding accounts in a timely and efficient manner while promoting a positive customer experience.

  • Select credit and collections personnel carefully and incentivize them to excel.  This is not a position where you want high turnover.  Effective collectors are a valuable commodity and should be rewarded for a job well done.

  • Be proactive to set the collections team up for success.  Educate your customers regarding payment expectations from the first point of contact.  When expectations are clear, there is less room for excuses when the invoice comes due.

  • Make sure your credit and collections staff understand the importance of courtesy and professionalism when dealing with customers.  

  • Utilize external collections only as a last resort.  At this point, you should plan on terminating your relationship with the customer once the issue is resolved.

  • Ensure management supports your credit and collections strategy and that it is in line with your overall customer relationship management strategy.

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Adopting Effective Credit and Collections Tactics

Just as there is no single strategy that works for every company, there are no clear-cut collection methods that are effective with every customer.  Consider a varied approach, taking into account the customer’s needs and specific circumstances:

  • Segment your customer base by risk level and payment history.  This is not an easy exercise, but it is a rewarding one.  Know which customers need constant attention and which ones are more self-managing.  

  • Document all collections activities. This allows a new collector to get up to speed quickly and is essential for holding the customer accountable for their commitments.

  • Use multiple contact channels.  Some customers prefer contact via email with electronic invoices and statements.  Others may be less technologically advanced and require a phone call.  Determine what gets the best results and use that approach consistently.

  • Every customer contact has an associated cost.  Strive to optimize the cost per dollar collected.  Account statements are low cost contacts and can be extremely effective when designed properly.

  • When pursuing a receivable, always ask for action (approval, payment, etc.) by a specific date and follow up accordingly.  Secure commitments from the customer and track compliance. After receiving a commitment for action, follow up via email to thank them for their commitment and reinforcing expectations.  

  • Always contact the same person, if possible.  This not only establishes a relationship with the customer contact, but it reduces the opportunity for miscommunication.

  • Strive to have a positive attitude until a more forceful one is necessary.  As accounts continue to age, it may become necessary to intensify your efforts.


Remove Impediments to Payment

When an account is past due, it is important to understand why it became delinquent and how to avoid that situation in the future.  Bear in mind that these roadblocks are not always customer issues. They may stem from your own policies and procedures. Anything your company is doing internally that makes it harder to collect payments should be reviewed and amended, if possible.

  • Include any necessary documentation with the invoice.  Many organizations will not pay an invoice without the related purchase order number.  By sending an invoice without it you are effectively guaranteeing a payment delay. Anything the customer requires to approve payment should be sent the first time, every time.

  • Transmit invoices electronically whenever possible and use priority mail for high value invoices.  Both of these methods offer confirmation that the invoice was received by the customer.

  • Bill what you quote and make all quotes available to the credit and collections team until payment is received.  

  • Resolve disputes immediately.  Once a customer has disputed an invoice, the ball is in your court.

  • Document and track why invoices are not paid on time.  With this information you can identify trends and potentially spot a problem with your own procedures.

  • Maintain customer records.  Companies are constantly changing ownership, employees, physical locations, and so on.  If you are unaware of these changes, or worse, if you are aware and don’t update the company’s account, it will inevitably create delays until you do.  


Utilize Software and Technology

The larger your customer base becomes, the more difficult it is to keep up.  There are numerous software packages and add-ons available to help you sort and organize receivables.  These automated processes are infinitely more efficient than managing from a printed report or manual spreadsheet and allow you to see where you stand in real time. For more bookkeeping tips and advice, click on the link below!

 

LUXA Enterprises offers outsourced accounting services for small businesses in the Tulsa and surrounding areas. If you’re considering a short or long-term approach to outsource accounting, give us a call for more information at 918-928-7288.

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Topics: Best practices