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Accounts Receivable - best practices

John Speyer's Profile

I would like to get some advice for best practices in A/R as it relates to credit limits and collections. We are a distributor and our customer base ranges from larger supermarkets down to smaller retailers. Generally the latter are harder to control. How do you assess how much credit to advance and their general credit worthiness?



Jane Levin
Title: Corporate Controller
Company: Private
(Corporate Controller, Private) |

Start with a D&B report. Yes, those can be too high-level, but I take a close look at their paydex for past behavior and current risk levels. We have a policy that states what we do at certain paydex levels (e.g. above 90 they get 30 days terms and $x of credit, from 80-89 they get 15 days and $y credit, below 70 we need to see their financials and below 60 they get nada unless they make special arrangements (e.g. prepay).

I will also request full financials if I need to see more. I will sign an NDA (b/c most people don't love sharing their financials - although they like it more than not doing business) to make them comfortable.

Jane Levin
Title: Corporate Controller
Company: Private
(Corporate Controller, Private) |

I just posted a few docs in the Resources area that will help., and and Hope they help out.

Fred Dempster
Title: Principal
Company: DemTat dba RMA
(Principal, DemTat dba RMA) |

I'd also recommend a visit to CRF - Credif Research Foundation and NACM - National Association of Credit Management for some of the basics.

Without getting too far in the detail, many large clients are "must sell" and keeping track in the news is the easiest way. Smaller accounts do not mean less work, typically more as you say. One historic way to set limits is to use D&B rating with an acceptable risk exposure, as smaller may not be financially rated. Simply, I had risk pools of A to D, with D being high, but contributing to revenue. CPG/Food has its own challenges, but as in all credit, he who calls on past due promptly gets paid first. Ping out if you want to chat. Thanks - Fred

Sara Voight
Title: Controller
Company: Critical Signal Technologies, Inc
(Controller, Critical Signal Technologies, Inc) |

Since I am charged with bringing in the cash, I have worked with my sales team to develop a reasonable credit policy (what is extended and how it is documented). I end up focusing more time on collections, however, that too has decreased significantly. My approach is consistentcy and communication. Where ever my customers stand as far as payment terms I make sure I have documented when they received their invoices and statements, all sent electronically. I then follow up at specific times to make sure they understand the consequences of being too late. Simple messages with clear instructions then lead to account suspension. Having developed our policies with all departments' input means I don't have to worry about others pulling rank and allowing someone with a payment problem to continue receiving services. Ultimately, the best practice with AR is to develop a plan with your sales, account management, and client service teams, so everyone is enforcing the same policies. It is better for the company and results in significantly lower DSO or write-offs. My DSO has dropped over 20 days since I started this project a year ago. In addition to impressing the board members, my bank is really happy to work with me as well.

Fred Dempster
Title: Principal
Company: DemTat dba RMA
(Principal, DemTat dba RMA) |

Sara has it - it is as simple as that: clear and fair policy, communications, and timely follow through and follow up - all on the same boat.

Only addition would be to assure sales/marketing plans are reviewed against the policy - e.g. there is a historical on where cell phones were first sold from kiosks in shopping malls and bypassed the credit check and bad debt popped up. Thanks - Fred

Phil Burch
Title: VP and CFO
Company: Nichols Brothers
(VP and CFO, Nichols Brothers) |

John's question - "How do you assess how much credit to advance and their general credit worthiness?" is the first leg of the traditional risk management system.

Loss Prevention (credit analysis, credit limits)
Risk Transfer (terms, security)
Loss Control (Collection, workout)

To answer the question of "How much credit?" you have to answer "How much can I stand to loose?" Doesn't matter how big the company, each has a unique answer. Percent of sales, a days production, a weeks payroll, the remaining amount of our bank line, etc. The second step is determining the likelihood that a single or series of bad debts will occur. Modeling is a credit way to gain insight here. What is the impact on you customers if fuel prices double or interest rates rise? Will it result in more or less demand for your product or service?
Now you are ready to analyze your customer's creditworthiness. D&B ratings are a poor substitute for your own analysis. You need timely financial data from your customers. You need customized algorithms specifically for your industry and company. You can use Excel or a Credit Risk Management system such as CreditPoint. Either way, you have to dig in and do the analysis. There are no short cuts or rules of thumb.

Damon Butler
Title: CFO
Company: The Protective Group, Inc.
(CFO, The Protective Group, Inc.) |

If you have limited resources, develop a profile that your Sales area completes with the customer, including expected annualized sales. You can put the expected sales up against terms to back into an expected credite requirement for the customer and then look at this amount versus the D&B and similar customers.
I find the other keys are consistentcy and being willing to not ship when people are past due / over their credit limit. Sounds simple, but once people know you're serious, they tend to pay in a reasonable fashion.

rhoda singer
Title: senior vice president
Company: Discount car and truck rentals
(senior vice president, Discount car and truck rentals) |

Once credit is established and a process of ongoing credit reports on the customer is needed, it is important to train the customer that you will be calling for payment within a certain period of time. for example, they will know that if a cheque is not received within 30 days, a call will happen. that is called training your customers on your payment schedule. i found that if that doesn't happen, then your invoice might go to the bottom of the pile. this way, your invoice will be attended to timely.


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