A sale is not a sale until the money is in the bank - Anonimous
How do you assess the viability of your organization? traditionally, for credit purposes you qualify the debt leverage, profitability and so on and so forth, but whether you are an entrepreneur, a major corporation or someone in between, the most important aspect of your operation is how do you generate cash; based on this starting point we have to concede the core cash influx out of the operation is your accounts receivables, therefore one of the main tasks of any organization should be have a healthy collections process.
All along my 20 plus years of experience, if there is something I've learned is that regarding Accounts receivables, there is a million ways to peel a cat; I remember back in the days at Tyco, I had an A/R Manager who used to say that been named an "SOB" by the company whom he was colleting from was the best compliment he could be paid; although it may sound a little harsh, his only job purpose was to get the colletion done, therefore I may understand his position, however A/R's are totally related to the kind of business you are running.
Once I was working for this chemichal company dedicated mainly to health and homecare businesses, where we have the privilege of being one of the main vendors for companies like P&G, Unilever, BDF, etc. and our product was one of the main components of some of their final products, on top of that, none of them would represent more than 5% of our total business which was a huge leverage on our side for collection purposes, we even have strict collection policies so we can twist their arms in order to get paid; obviously we had sort of a love-hate relationship, but at the end of the day it was a very profitable relationship.
Also I had another chance to work with one of the most professional accounnts receivable managers I've ever know while working with Sulzer, I remeber Ms Lina, an eldery lady with full knowledge of what she was doing, always in control, there was no stone left unturned, no posibility of failure whenever she sent a collectable invoice to our customers, so there was no chance whatsoever of customers delaying payment. I wouldn't say it didn't happen, but when it did, she was prepared to unleash hell on them. In all fairness those were the lesser cases, she also was a master negotiating collections
As I said earlier, there is a link between your kind of business and the way you'll manage your collections, We would really love if everybody issue payments in a timely manner, and there where a perfect forecasting on A/R's, but unfortunately that ain't the case; most of the time we will face shortcomings on collections or may be credits terms breach, so we have to really be able to manage the cash flow time and again.
Within my experience, what has really helped me doing so, it's been the cash flow forecast, what I do, is forecast collections not by the due date exclusively, because it's a common practice that the date the customer receives the billl and process it, starts the countdown for payment, regardless of the invoice due date. This practice is commonly used in Latinamerica, on top of that, another "strategy" is to limit the payment dates, as per instance a company may decide to issue vendor payments once a week or every two weeks or in a monthly basis; therefore depending on when the invoice was accepted for payment plus credit terms, plus this strategy, then you have a potential payment date. Should we be more aggresive pursuing payment? definitely! however for cash management purposes being a little more conservative is better, at least from my perspective; because I better have an early unscheduled payment than a shortage of available cash, and as far as it's a rolling forecast whatever was delayed must be pushed for the next collection period, including a red overdue flag. This cash flow forecast is created in a weekly basis for the first month and montlhy for the rest of the forecasted period, regularly I would used 3 months depending on the business cycle.
Last but not least there are additional instruments to get collections done, options like factoring are always helpful, however it will relate to the customer allure and it obviously have a financing cost involved, therefore we need to be very careful assesing the cost-benefit relation whenever using this option; early payment discounts are another option which may or may not help depending on the attractiveness of the discount for the customer and we have to be very careful assesing those discounts.
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