How to evaluate and manage accounts receivable risks

Jennifer Hall, treasury management specialist, Associated Bank

Establishing an efficient accounts receivable process is a critical step for most businesses, which can necessitate a major balancing act, says Jennifer Hall, senior vice president, middle market sales director, Commercial Deposits & Treasury Management, Associated Bank.

“You and your customer likely have different goals,” says Hall. “You want to receive payment as quickly as possible for the products and services you’ve delivered. Your customer, on the other hand, wants to delay payment as long as possible. You need to come up with solutions that are acceptable to valuable customers while minimizing the time you have to wait for payment and the risk of nonpayment.”

Smart Business spoke with Hall about how to strike a balance when it comes to accounts receivable.

Why is developing an efficient accounts receivable process so important?

How quickly receivables are paid directly affects your cash flow, and properly balanced cash flow is essential for stability. The faster you can collect outstanding receivables, the faster the cash can be spent to meet payroll and other expenses, pursue expansion and investment goals, or enhance company profits.

Collection delinquencies make it difficult to forecast cash flow and may mean the business has to create a bigger cash cushion than it otherwise would in order to deal with slow payments and still meet its obligations.

How can a business evaluate its risks?

First, run credit checks so that you can set up payment terms accordingly. A customer with less-than-stellar credit may need to pay more up front, whereas a reliable customer may earn an extended payment arrangement.

Second, anticipate and prevent late payments. Automatically monitor your receivables aging. Are there customers whose payments routinely lag? Do you have a goal for new customer collection periods? Perhaps you could negotiate discounts for early payment or institute a down payment plan so some cash comes in early. With new customers, set expectations for credit and collection terms up front and act swiftly to collect when a payment is past due.

Monitoring your accounts receivables closely allows you to quickly identify trends in payment behavior. If a customer routinely pays on time but has had months of late payments, this could be a red flag. Perhaps it is in financial trouble or is losing confidence in you as a supplier. Either way, it merits a call to see if there are steps that could prevent future problems.

Third, spread the risk. If your business is dependent on the payment timeliness of a few large clients, you are at greater risk than if receivables are more evenly spread across many smaller ones. If one large trading partner goes bankrupt or develops erratic payment habits, your ability to predict and efficiently manage your cash flows may be significantly affected.

Another risk occurs when you are a supplier to a major corporation with the clout to demand payment terms that involve not only deep discounting but also significantly extended payment timelines. Factor these payment arrangements into your cash flow planning.

How can a business manage its orders and minimize it receivables conversion cycle

Make it easy to buy. Ordering should be quick, easy and accurate. Expedite the purchasing process. Also provide immediate payment options and offer phone assistance. Having someone to answer questions can increase your order completion rate, and customer service representatives can suggest complementary products, resulting in incremental sales. Also discourage orders via traditional mail, which increases the receivables cycle. Finally, provide timely product shipments or service completion. The timely conversion of orders to cash can be sabotaged by internal inefficiencies or lack of precise knowledge of production metrics. Defining and measuring important targets allows you to prevent critical product or service shortages.

How can a company streamline receivables?

Strive to invoice within 24 hours of shipment because the customer won’t begin the payment process until the invoice is received.

Make invoices simple. They typically go to the accounting group, so superfluous information is a waste of time and money and can confuse the main point — the amount due. To speed payment, make it easy for the customer. Here are some treasury management products and services that may help.

* Electronic payments and deposit. Reducing paper transactions can speed payment. By using electronic solutions such as automated clearinghouse (ACH), wire payments and credit cards, the time between delivery of the product or service and payment is minimized.

* Lockbox services. For businesses that receive a large number of check payments or large dollar check payments, lockbox services can streamline the process and reduce the time from check receipt to deposit. Checks are sent directly to a remittance address owned by the bank and retrieved multiple times each day to expedite payment processing, minimizing mail, processing and information float while maximizing funds availability.

* Remote deposit capture. This accelerates paper check deposits into your business account. Scan checks at your location to create a digital file that is sent to the bank over a secure Internet connection. This reduces mail and check float and allows you to export data directly into your accounts receivable system.

* Online information reporting. Simple report statements, CD-ROMs containing lockbox images, both data and image transmission files that can be uploaded into your accounts receivable or ERP systems, and online and Web-based information delivery services can provide timely and convenient access to your account information.

No matter how healthy your sales, an inefficient or ineffective accounts receivable process can hinder growth. A treasury management expert can evaluate your receivables needs and suggest cash management solutions to streamline receivables processes and improve cash flow.

Associated Bank, N.A., is a Member FDIC and Associated Banc-Corp.

Jennifer Hall is senior vice president at Associated Bank. Reach her at (312) 565-5275 or [email protected]