Profit Report 2402

HOW TO EFFECTIVELY

MANAGE YOUR ACCOUNTS

RECEIVABLE

provided by: Independent Business Association

Do you run a small business AND a small bank? When you grant credit, you do. The following are tips from a very effective credit manager on how to greatly improve your chances of getting paid on time.

Many small business owners find they are in the banking business by surprise when they aren’t paid by their customers. Following are IBA’s 10 Keys To Getting Your Money.

1. Establish a written credit management plan and follow it. Everyone in your firm must know your firm’s credit policies and why you have set them as you have. Not having written credit and collection policies makes for an inconsistent and often confusing operation, just waiting to be taken advantage of.

2. Banks don’t lend to just anyone, they make sure the person or firm they are lending to is credit worthy. YOU must do they same. Don’t sell anything on account unless you know for a fact that the purchaser is a very good credit risk. Join a credit bureau or other credit reporting firm to get credit information. You MUST have the customer complete a credit application and you MUST do the appropriate credit checks before making sales on account. If you don’t your chances of becoming a charitable-giver to this new customer are 3 to 5 times more likely. If you don’t do this work, its like starting a road trip in your car with a blindfold on.

YOU even need to watch past customers, especially those who have done business with you in the past, then stopped and are now coming back. Get CURRENT credit information for them if their account has been inactive for 30 days more than usual.

3. If you can, secure your interest in the items you have sold on credit, or otherwise protect your interest using liens.

To protect your security interest in items you have sold, you must have the purchaser sign a security agreement and a UCC-1 form at the time of sale which acknowledges that you are the owner of the item until the customer pays the full amount for the item. Not all items sold can be sold with security interest remaining with the seller, but if you are selling stand alone equipment or items that are not incorporated by the purchaser into other items, you may well have the right to retain security interest in the item you sold. This is additional paperwork, but it can save a great number of headaches, especially with new accounts and large ticket items.

There are a number of liens that sellers can use to protect their payment interest. In construction, there are Mechanic and Materialmen’s Liens. In businesses like auto repair, their are possessory liens and chattel liens.

For additional information on security interest or liens, request IBA Document 2416 and for construction lines, request Document 2412.

4. Bill your customers promptly. Billing is paperwork and most of us hate paperwork, but one of the fastest ways to become a banker is not billing your customers promptly after the sale is made.

On your billings and the original purchasing document, be sure to include the terms of billing, like: 2% 10 days, net 30, 1.5% per month for past due accounts. This tells your customer what the terms for payment are and ensures that you can collect interest on past due accounts. If you do not indicate an interest rate for past due accounts on the original purchasing document received by your customer, you can only charge 1% per month.

5. Keep good and current records. YOU need to know who owes you how much and when it is due. Failure to have good records is one of the fastest ways to become a charitable giving organization.

There are a number of easy to learn, easy to use computer programs to help you keep your records. They are often quicker than keeping these records manually. Many of them can be up and running in just a few hours.

6. Age your accounts regularly. You should know weekly, who owes you how much money and for what period of time. YOU get very important information from this data. If one of your regular customers is falling behind, it’s time to find out why. Maybe it’s time to stop selling them on account until they get caught up.

7. Send statements monthly to your accounts receivable. Age their account so they see how much of their account is current and how much is past due. Charge interest on past due accounts.

8. Contact your accounts with past due balances very promptly. The longer an account is delinquent, the less chance you have to ever get your money. The chances of collecting an account that is 90 days past due is about 20% of collecting an account that is 30 days past due.

Call your late paying accounts and be friendly while being clear that you need to know when you can expect payment. Get a specific commitment, and repeat that commitment to your customer.

9. Write down the key elements of all discussions, when you called, who you talked with, any reasons for late payment they may have offered, and especially when they agree to pay you.

10. Keep a collection calendar to follow-up with your customer if a payment date comes and goes and no money is received. This is very important. The creditor who is most prompt asking and following up for money is most often the creditor who gets paid.

Let someone else be their banker, get your money!

11. Begin collection actions promptly when warranted. Delaying on beginning a collection action usually results in a loss of money. Remember, time is your enemy when you are trying to get paid.

WHEN MAKING A SALE CAN COSTS YOU!

Below is a chart showing when a sale turns into a cost. Clearly the goal of being in business is to make a profit on a sale after all costs have been paid. But, if you are slow in collecting your accounts receivable, a sale can actually turn into a cost for your business, not a profit because you cannot recover the merchandise without additional cost, you cannot recover the labor that went into making the sale, and you cannot recover your overhead associated with that sale.

ACCOUNTS RECEIVABLE AND WHAT THEY CAN COST YOU

You make a $100 sale and your net profit, before taxes, is $6 if you get the money at the time of the sale. If you sell on credit, the money you are waiting to collect from your account receivables is costing you, whether you borrow so you have the money to use while you are waiting to get paid, or you simply don’t have the use of that money (i.e. to invest) while you wait to get paid. The chart below shows how much profit you lose at various interest rates while you wait to get paid and what your chances of getting paid are. These costs do NOT include the extra costs you incur in trying to collect the account.

Date	Profit Remaining @ 8% interest	Profit Remaining @ 10% Interest	Profit Remaining @ 12 % Interest	Approx. Chance of Getting Paid
Day 1	$6.00	$6.00	$6.00	95+%
Day 30	$5.33	$5.17	$5.00	90+%
Day 60	$4.67	$4.34	$4.01	85%
Day 90	$4.01	$3.52	$3.03	70%
Day 120	$3.36	$2.71	$2.96	50%
Day 150	$2.71	$1.90	$1.10	40%
Day 180	$2.06	$1.10	$0.15	25%
Day 210	$1.42	$0.47	-$0.79	10%
Day 240	$0.79	-$0.47	-$1.73	<10%
Day 270	$.015	-$1.25	-$2.65	<5%