AR Mgmt
Tuesday, January 18, 2022
Having any cash issues? AR issues? Taking too long to collect? Is your bad debt more than ½ of 1% of total revenue? Need more money to grow and you don’t want to borrow?
Sometimes the best way to help or coach someone is to ask them questions. This helps the coach to understand how things are currently being done and to have the one being coached think about how they are currently going about getting the work done. Recently, someone inquired of me how to handle their receivables problem/reduce the age of their receivables and reduce bad debt.
Managing receivables involves much more than the obvious work of setting up a new account, billing on time, calling late payers, establishing systems, procedures and policies around this activity and when the time has come to bad debt an account and what procedures should follow the decision to bad debt. It also involves motivating customers to pay on time and making it easy for customers to give you their money. It also pays to keep in mind that the longer it takes you to collect on an account, the less likely you are to ever see the money.
Managing receivables also means having a short time in terms of the average time to collect. Two benchmarks worth noting in all this are:
• Having bad debts being no more than ½ of 1% of revenue. For example, if your revenue is a $100, your bad debt should be no more than 50 cents. If revenue is $100K, then bad debt should not be more than $500.
• The average time to collect should not be more than 10-15 days on an account serviced. This, of course, depends on who is your client and what your collection and billing procedures and policies are.
Another target to keep in mind (and keeping this in mind will help to keep your team goal-oriented in their collection activity) is to never get your company in a position where you have to borrow money for working capital. I built a company in our industry to $35,000,000 and was the 14th largest company on the PCT Top 100 list. I never borrowed any money except for vehicles. They were basically 100% financing with very low interest rates and the financing included the build-out needed for the vehicle.
Working capital is the sum of cash and highly liquid investments that a business has on hand to pay for day to day operations such as payroll, all costs associated with vehicles, materials and supplies, etc. Technically speaking, working capital is equal to the total of a company’s current assets minus its total current liabilities on its balance sheet. The average collection period ratio measures the average number of days clients take to pay their bills, indicating the effectiveness of the business's credit and collection policies. Some might say that if your average collection period is less than 30 days, that is favorable. I have never been comfortable with that guideline. When I owned a pest control and lawn spray business, I wanted to see (and was successful at) keeping the average time to collect under 15 days.
So, some questions to ask yourself:
• When setting up a new account, do you require payment at time of sale before the initial service is done?
• If a customer already has a service with you and buys another one in a different line of business that you offer, how is that new sale handled? Same as above?
• Do you require the use of a credit or debit card for auto-pay on any new sales or all sales?
• How often do you bill?
• How do you bill? Email? Snail mail?
• When do you (or someone on your team) begin to call customers for accounts past due?
• How often do you call accounts past due? What time of day do you call them? Do you call them at different times of the day?
• Do you put accounts/services on hold when they get to a certain point? If so, what point is that?
• When you put an account on hold for non-payment (if you do), do you do it before they get another service which would then make them with two services past due?
• If you put an account on hold for non-payment, do you put all of their services they have with you on hold even if the others are current?
• If you bad debt an account, do you require them to pay the bad debt amount if they come back later for service again before they get more service?
• Do you require auto-pay on accounts that have a history of slow pay?
• Do you offer a small discount if they pay by auto-pay?
• What percent of your customers are on auto-pay?
• What are the reasons people give you for not paying when collection calls are made? What is the most common reason?
• Is there a particular route or area of town that has the majority or a large percent of the slow payers or those who are bad-debted?
• What is your bad debt process? Who handles the collection of the accounts that you bad debt? What is their success rate?
• What percent of your total revenue are you bad-debting?
• Is there a particular line of business that has the most slow payers or bad debts?
• Do you have a script that you use for collection calls?
• What is your customer retention rate? How do you calculate that? Sometimes people do not pay because they are not happy customers.
There is more to this issue but answering and thinking about the answers to the questions above may make you think of something more you can do. When you get an uninterrupted hour, watch this video. It is a presentation I made for PCT magazine on a webinar.
