Are your collections as good as they should be?
Back in the early 80’s I bought a house. At the time, I considered myself fortunate on two fronts: 1) that mortgage money was available and 2) they were ONLY going to charge me 12-3/4% due to my good credit. Eighteen months later the going rate was over 15% if you could find the money at all. I mention this in passing and as a reminder that near zero rates are the exception, not the rule.
At the time, I was a relatively young CFO who had just signed a personal guarantee for many orders of magnitude more than my personal net worth in order to participate with other members of management in a hot thing at the time – a leveraged buyout of our company. Banking rules were quite a bit more liberal in those days and high rate money was available. We basically put up a bunch of our own money, pledged all the assets of our company and signed our names to more debt than any one of us either individually or collectively could muster. It was like a monopoly game played with real money and consequences. The banks were going to make money whether we did or not. It was in this crucible that I learned what I intuitively had always known – cash is king!
The operative letter in LBO is the “L”. It is the leverage. Putting up a dime and borrowing a dollar. Not only did we individually have a load of debt, so did the company. Along with that company debt came a slew of restrictive covenants further protecting the banks position. Cash flow was very tight and largely spoken for. We had to actively and aggressively manage our inventory, accounts receivable and accounts payable. This was the three legged stool that kept us afloat and moving forward. We tried to accelerate A/R collections, defer A/P payouts and keep inventory tight and in stock on best sellers.
Businesses are like people. They fall into bad habits. Sometimes they consider the sale the most important aspect of their business. Sales cures all ills? Well, they cure a lot of them. Given the choice of high sales or low sales most will take the former. But it’s not truly the sale that matters. The sale is merely one of the steps in the cash cycle if you sell on credit. Vital? Yes. But if you don’t collect it you’ve not accomplished much. If your sales strategy is to sell on credit to unemployed people, I’m going to go out on a limb and suggest you’ve got an issue to deal with.
By the same token, I’m also going to say that if you only sell on credit to people with FICO scores in the 800’s that you’re not doing as well as you could be. Granted, you’re not likely to experience high bad debts but your sales and profitability are lower than they might otherwise be.
Bank of Bad Habits
Bank of bad habits,
the price of vice foretold
One by one they’ll do you in,
they’re bound to take their toll
The wrong thing is the right thing
until you lose control
I’ve got this bank of bad habits
in a corner of my soul.
Dynamics NAV can help. I’m presuming you’re already doing a decent job of vetting your customers from a credit-worthiness or risk perspective. No one purposefully sells to people they know will not pay.
You’re probably running an Aged Accounts Receivable report on a regular basis. You are probably having a dialog with your customers on an ongoing basis. You should know who’s doing well and who might be struggling. That is probably part of your normal business intelligence gathering. You may even be making routine entries on the customer comments card.
But there is one more thing you could be doing that you may not even be aware of. Dynamics NAV has a REMINDERS functionality. It’s easy to setup and it’s easy to implement. It puts you in charge.
In simple terms, you create code(s) for reminders and then associate those codes with your customers. Many businesses follow an 80/20 pattern. Maybe 80% of your sales come from 20% of your customers. These are your bread and butter. If one of the 20% goes south on you it’s going to hurt more than if one of the 80% does. Even in the 20% you might have further subdivisions that make sense.
Everyone like to think that they treat all customers the same, that the customer is always right. I would argue that in the main that is not true and furthermore it’s hardly ever true. Your attitude toward customer should be consistent but I promise you if you have a single customer who represents 25% of your revenue you will treat him differently. And it is both right and proper that you should.
With Dynamics NAV reminders, you can, if the circumstances warrant, treat all customers the same. You could also stratify your customer base into A, B, C type classifications or 1, 2, 3, etc. where each classification represents a different risk/reward relationship. You can customize your messages that will appear on the reminders. You can even use reminders as a vehicle to assess late fees and or interest charges on late payments. And you can do so in what is largely an automated process. You may review and send past due notices once a week or every two weeks or once a month. Using criteria that you have decided upon.
A wise man once told me that down business cycles were useful and appropriate because they weeded out the weak. The ones who probably should not have been in business anyway.
I’m not certain that is true. But I do know that the bad habits that become part of your practices when times are good are very quickly dispensed with when times get tougher. I’ll wager you will look at your business differently if the market rate is 9% than you do if it is 0.9%.
The question I pose to you is why you don’t do the same things in both situations. Expend as much collection activity now as you will spend when rates go up.
Dynamics NAV Reminders can be a way of starting and maintaining a different dialog with your customers, one that tells them you are looking and that paying for things timely matters. It will pay substantial dividends when the bad times come back. And they will. They always do. Break those bad habits now. Please feel free to call ABS if you want more information on how to setup and use Reminders functionality.