End To End Accounts Receivable Process

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Best in class Accounts Receivable Procedures

End To End Accounts Receivable Process

  1. 1. End-to-End Process for Accounts Receivable Author: Scott A. MacDonald Course design: AlphaMac Resources, Inc. (c) 2010 AlphaMac Resources, Inc. All Rights Reserved 316.209.7400 www.alphamac.com Distributed by: Alliance Training & Consulting, Inc. 8900 Indian Creek Parkway, Suite 270 Overland Park, KS 66210-1510 913.385.5515 www.alliancetac.com SMA Solar Technologies Course Instructor: Miles Hutchinson
  2. 2. Objectives of this Course <ul><li>Apply current accounts receivable management techniques </li></ul><ul><li>Understand the importance of contract management to the A/R process </li></ul><ul><li>Institute best practices for a credit & collections function </li></ul><ul><li>Learn the importance of training of everyone in the total A/R process </li></ul><ul><li>Protect the company by understanding the risk inherent in your customer list. </li></ul><ul><li>Understand why the use of a loss mitigation company is only a matter of “when” not “if”. </li></ul><ul><li>Streamline your process for maximized efficiency and improved cash position </li></ul>(c) 2010 AlphaMac Resources, Inc. All Rights Reserved
  3. 3. A/R Lifecycle Management of Cash Flow Prospective New Client Legal action for non-payment (c) 2010 AlphaMac Resources, Inc. all rights reserved. Up-to-date Written Policies and Procedures Outsource non-core competency Evaluate customer pre and post sale – good intelligence Reduce risk with credit products or other means Performance measures and periodic evaluation of economic conditions Properly staffed and trained Tracking Tools
  4. 4. 4 Pillars of Accounts Receivable (c) 2010 AlphaMac Resources, Inc. all rights reserved. Document Policies & Procedures Measure & Monitor Post-Sale Pre-Sale Analysis and qualification process to reduce credit risk up front. EVALUATION Measure internal processes and monitor customer behavior. M&M Get control over your cash flow by making your receivables work for you. PROCEDURES Cash application, payment history, collections and cash flow, etc COLLECTION
  5. 5. Property & Equipment Cash, Investments, & Foreign Currency Exposure Liability Insurance Inventory Insured & / or Actively Managed Uninsured & Not actively Managed Borrowing & Interco Lending Accounts Receivable (c) 2010 AlphaMac Resources, Inc. all rights reserved. Business Risks
  6. 6. What do you think? <ul><li>Why is A/R important? </li></ul><ul><li>Do you believe your organization places importance on A/R? </li></ul><ul><li>Has your organization identified all the risk in A/R? </li></ul><ul><li>Where do you think your organization can do a better job managing A/R? </li></ul><ul><li>What does your organization do well in managing A/R? </li></ul><ul><li>Does your organization have an “owner” of A/R? </li></ul><ul><li>How well is your A/R process documented? </li></ul>(c) 2009 AlphaMac Resources, Inc. All Rights Reserved
  7. 7. Accounts Receivable <ul><li>Why is Accounts Receivable to important </li></ul><ul><li>Contract administration and its effect on managing A/R </li></ul><ul><li>Cash applications process is important </li></ul><ul><li>Cash management techniques </li></ul><ul><li>When to invoice </li></ul><ul><li>Where does invoice info come from? </li></ul><ul><li>Methods of presenting invoices for payment </li></ul><ul><li>Methods of receiving payments </li></ul><ul><li>Management reporting of aging </li></ul><ul><li>Importance of status calls to customers </li></ul><ul><li>How and when to talk to the sales staff </li></ul><ul><li>How to handle customer questions </li></ul><ul><li>Streamline with automation and help from your bank </li></ul>(c) 2010 AlphaMac Resources, Inc. All Rights Reserved
  8. 8. Customer Vetting <ul><li>What does your company do? </li></ul><ul><li>Who are your customers? </li></ul><ul><li>What are their needs? </li></ul><ul><li>What is their financial situation? </li></ul><ul><li>How have they treated other vendors? </li></ul><ul><li>How have they treated their other payment obligations like the government? </li></ul><ul><li>What is their industry? </li></ul><ul><li>Who owns them? </li></ul><ul><li>Who is their ultimate owner? </li></ul>(c) 2010 AlphaMac Resources, Inc. All Rights Reserved
  9. 9. Customer Vetting (continued) <ul><li>Are they domestic or foreign? </li></ul><ul><li>Where are they located? </li></ul><ul><li>Who is their law firm? </li></ul><ul><li>Who is their accounting firm? </li></ul><ul><li>Why do they want to do business with you? </li></ul><ul><li>Are they a related party? </li></ul><ul><li>Is address of company a mail drop? </li></ul><ul><li>How do they answer the phone? </li></ul><ul><li>Where did the lead come from? </li></ul><ul><li>What is a Z Score? </li></ul>(c) 2009 AlphaMac Resources, Inc. All Rights Reserved
  10. 10. Customer Monitoring <ul><li>Payment history </li></ul><ul><li>Occurrences of NSFs </li></ul><ul><li>Returned invoices or large number of credit memos </li></ul><ul><li>Unusual address changes </li></ul><ul><li>Economic conditions of your customers </li></ul><ul><li>What other monitoring does your company do? </li></ul>(c) 2010 AlphaMac Resources, Inc. All Rights Reserved
  11. 11. When do you call about payment? <ul><li>Best Practice – Status call “high risk” customer BEFORE due date </li></ul><ul><li>You will have to define “high risk” </li></ul><ul><li>Some factors are past payment problems, past order problems, significant credit memo history, etc. </li></ul><ul><li>What is your company practice? </li></ul>(c) 2009 AlphaMac Resources, Inc. All Rights Reserved
  12. 12. Something You Need to Know <ul><li>DSO </li></ul><ul><li>(Total Receivables/Total Credit Sales) x Number of Days in the measurement period = Day Sales Outstanding </li></ul><ul><li>Example of DSO: Total Receivables = $5,000,000.00 Total Credit Sales = $10,000,000.00 Number of days in period = 90 (5,000,000.00/10,000,000.00) X 90 = 45 days (DSO) </li></ul>(c) 2010 AlphaMac Resources, Inc. all rights reserved.
  13. 13. One More Thing to Know <ul><li>Best Possible DSO </li></ul><ul><li>(Current Receivables/Total Credit Sales) X Number of Days = Best Possible DSO Example of Best Possible DSO: Current Receivables = $2,500,000.00 Total Credit Sales = $10,000,000.00 Number of days in period = 90 </li></ul><ul><li>(2,500,000.00/10,000,000.00) X 90 = 22.5 days (best possible DSO) Best Possible DSO yields insight into delinquencies since it uses only the current portion of receivables. As a measurement, the closer the regular DSO is to the Best Possible DSO, the closer the receivables are to the optimal level. It helps to distinguish between length of selling terms and delinquency. </li></ul>(c) 2010 AlphaMac Resources, Inc. all rights reserved.
  14. 14. Accounts Receivable Aging <ul><li>Listing of A/R accumulated by number of days past due </li></ul><ul><li>30, 60, 90, 120 are typical categories </li></ul><ul><li>Should be getting at least monthly </li></ul>(c) 2010 AlphaMac Resources, Inc. all rights reserved.
  15. 15. Case Study #1 <ul><li>It is early December 2005. </li></ul><ul><li>Your company manufactures televisions. You are approached by Circuit City to supply TVs. You estimate that your revenue will grow 30% with this addition. </li></ul><ul><li>Your sales manager and his staff won’t meet their goals this year unless you sign them and your sales manager has already threatened to quit if the deal isn’t OK’d. </li></ul><ul><li>The net margin is a little below what you normally do, but the deal appears to be profitable if the number of units meets expectations. </li></ul><ul><li>Circuit City hasn’t given you any trade references yet or any financial statements. </li></ul><ul><li>Your sales manager’s uncle knows someone at the bank that knows someone in the accounting department at Circuit City and says they are a good credit risk. </li></ul><ul><li>CC stock went from $9 per share in Sept 2003 to $20 per share in Nov 2005. </li></ul><ul><li>Is this a good opportunity? </li></ul><ul><li>How would you go about setting a credit limit? </li></ul><ul><li>What facts are relevant to your decision? </li></ul>(c) 2010 AlphaMac Resources, Inc. all rights reserved.
  16. 16. Case Study #2 <ul><li>The year is 2008, is your deal with Circuit City still good? </li></ul><ul><li>Note: For those that don’t know, Circuit City filed bankruptcy in early November 2008. </li></ul>(c) 2010 AlphaMac Resources, Inc. all rights reserved.
  17. 17. Credit Reports <ul><li>Used to measure financial strength </li></ul><ul><li>Most info is “old history” </li></ul><ul><li>Some credit companies have predictive methods (Z Scores) </li></ul><ul><li>Can change daily </li></ul><ul><li>Your customer monitoring system should be on-line and alert major changes </li></ul>(c) 2010 AlphaMac Resources, Inc. All Rights Reserved
  18. 18. Credit Insurance <ul><li>Has your company every considered Credit Insurance? </li></ul><ul><li>Reduces risk of loss to near zero </li></ul><ul><li>Lets you know which of your customers is NOT credit worthy </li></ul><ul><li>Includes on-going credit monitoring </li></ul><ul><li>Sets credit limit </li></ul><ul><li>May help expand your business </li></ul>(c) 2010 AlphaMac Resources, Inc. all rights reserved.
  19. 19. Other Risk Mitigation Strategies <ul><li>Letter of Credit </li></ul><ul><li>Personal guarantees </li></ul><ul><li>Liens </li></ul><ul><li>UCC – talk to your legal team for advise </li></ul><ul><li>Right to take product back – in contract </li></ul><ul><li>Recouping costs of collection </li></ul><ul><li>Credit application </li></ul><ul><li>Do you have any other strategies? </li></ul>(c) 2010 AlphaMac Resources, Inc. All Rights Reserved
  20. 20. Use of Factoring <ul><li>Do you know what factoring is? </li></ul><ul><li>Factoring = selling A/R to third party at discount. </li></ul><ul><li>Used when cash flow is needed. </li></ul><ul><li>Best application when high margin items. </li></ul><ul><li>All factoring companies are not created equally. </li></ul>(c) 2010 AlphaMac Resources, Inc. all rights reserved.
  21. 21. Following Terms of the Contract <ul><li>Are you following contract terms? </li></ul><ul><li>Is the customer following the terms of the agreement? </li></ul><ul><li>Do you have a central repository for contracts? </li></ul><ul><li>How are contract terms communicated to Accounts Receivable staff </li></ul><ul><li>Who monitors changes? </li></ul><ul><li>Are your contracts backed up off site? </li></ul><ul><li>When do you stop delivering? Get legal advise!!! </li></ul>(c) 2010 AlphaMac Resources, Inc. All Rights Reserved
  22. 22. Cash Applications <ul><li>How current are your cash applications? </li></ul><ul><li>The dirty little secret of “cash suspense”. </li></ul><ul><li>By the way, who owns your cash float? </li></ul><ul><li>Does your invoicing process facilitate easy payment? </li></ul>(c) 2010 AlphaMac Resources, Inc. All Rights Reserved
  23. 23. Best Practices A/R Function <ul><li>Policies and Procedures must be in Writing AND up-to-date </li></ul><ul><li>Qualify/Vetting before sale – potential use of credit insurance </li></ul><ul><li>Account opening procedures </li></ul><ul><li>Monitor customers after sale </li></ul><ul><li>Follow contract terms </li></ul><ul><li>Cash application MUST be current </li></ul><ul><li>Determine when factoring might be advantageous </li></ul><ul><li>Evaluating industry conditions periodically </li></ul><ul><li>Classify customers – Slow Pay, Won’t Pay, Can’t Pay </li></ul><ul><li>Proper staffing, compensation and training in all functions </li></ul><ul><li>Determine “when” not “if” you will use an outside collections expert </li></ul><ul><li>Feedback to sales force </li></ul><ul><li>Proper systems to track A/R and collections activities </li></ul><ul><li>Process for legal action </li></ul><ul><li>Outsource non-core competencies </li></ul><ul><li>Benchmark and Performance Measures </li></ul><ul><li>Internal controls and confidential incident reporting by employees, customers and vendors. </li></ul>(c) 2010 AlphaMac Resources, Inc. all rights reserved.
  24. 24. What to do when you aren’t getting paid. <ul><li>So you have done everything right </li></ul><ul><li>Credit reports </li></ul><ul><li>Monitoring </li></ul><ul><li>Measuring </li></ul><ul><li>And your customer still isn’t paying </li></ul><ul><li>What are your collection options? </li></ul>(c) 2010 AlphaMac Resources, Inc. All Rights Reserved
  25. 25. In-House Collections <ul><li>Who does in-house collections? Are they really collectors? </li></ul><ul><li>How are they trained? </li></ul><ul><li>What is their “real” job? </li></ul><ul><li>Do they use a script? </li></ul><ul><li>Do they have an up-to-date contact list? </li></ul><ul><li>How is the salesperson involved? </li></ul><ul><li>Are his/her sales commissions effected by slow pays or charge-offs? </li></ul><ul><li>Are collections your core competency? </li></ul><ul><li>Classify your customers – Slow Pay, Won’t Pay, Can’t Pay </li></ul><ul><li>Give your collectors access to credit reports </li></ul>(c) 2010 AlphaMac Resources, Inc. All Rights Reserved
  26. 26. In-House Collections (continued) <ul><li>How much does it cost to collect in-house? </li></ul><ul><li>What system do you use to track collections? </li></ul><ul><li>Collectors are a different breed of cat </li></ul><ul><li>How do you motivate collectors? </li></ul><ul><li>What are the legal ramifications of a personal accounts vs. commercial accounts? </li></ul><ul><li>Does legal need to be involved? </li></ul><ul><li>Stopping the Domino Effect </li></ul>(c) 2010 AlphaMac Resources, Inc. All Rights Reserved
  27. 27. 10 Top Reasons Businesses Fail with Internal Collection Initiatives <ul><li>No formal policy </li></ul><ul><li>Lack of collection knowledge </li></ul><ul><li>Staff lacks experience </li></ul><ul><li>Lack of manpower </li></ul><ul><li>No tracking software </li></ul><ul><li>Wrong methodology </li></ul><ul><li>Lack of credit reporting </li></ul><ul><li>Waiting too long to outsource problems </li></ul><ul><li>Lack of an outsourcing partner </li></ul><ul><li>When they don’t know WHAT to do, they do NOTHING! </li></ul>Courtesy Creditors Resource Group
  28. 28. Group Exercise <ul><li>2 groups </li></ul><ul><li>Group A – Come up with reason to use an outside collection agency </li></ul><ul><li>Group B – Come up with reason NOT to use an outside collection agency </li></ul><ul><li>Each group list top 5 most important reasons. </li></ul>(c) 2010 AlphaMac Resources, Inc. All Rights Reserved
  29. 29. When to Use Outside Collectors <ul><li>It should be “when” not “if” </li></ul><ul><li>Should be based on chronological trigger </li></ul><ul><li>Find an agency – 12k to chose from - </li></ul><ul><li>Know the important factors in choosing an agency </li></ul><ul><ul><li>People, systems, remit frequency, professionalism, management </li></ul></ul><ul><li>If you don’t know where to start in selecting an agency, talk to AlphaMac Resources, Inc. They have already done all the leg work. </li></ul><ul><li>Remember, every month your chances of collection drop 8% to 10%, plus cost of funds. </li></ul><ul><li>All agencies work on contingency of some sort, average is 25% across the industry. </li></ul><ul><li>Biggest reason companies don’t use Outside Collectors – don’t want to make “good” customer mad. </li></ul><ul><li>Do you do your own brain surgery? Of course not, you call in the professionals. </li></ul>(c) 2010 AlphaMac Resources, Inc. all rights reserved.
  30. 30. What to look at in a Collection Agency <ul><li>You have to know your internal costs to make an informed decision? </li></ul><ul><li>Systems matter </li></ul><ul><li>Size is relative </li></ul><ul><li>Do they do credit reporting </li></ul><ul><li>Experience matters </li></ul><ul><li>What about international accounts? </li></ul><ul><li>When do you take legal action? </li></ul><ul><li>Bringing other solutions to your customers </li></ul>(c) 2010 AlphaMac Resources, Inc. All Rights Reserved
  31. 31. (c) 2010 AlphaMac Resources, Inc. all rights reserved. &quot;Witch&quot; to help collection agency Jan 08, 2009 TBT Staff in cooperation with BNS http://www.baltictimes.com/news/articles/22087/ VILNIUS - The Skolu Isieskojimo Biuras debt collection agency has begun working with Vilija Lobaciuviene, Lithuania's so-called chief &quot;witch,&quot; to help out with debt recovery from companies that won't pay up. &quot;We will first look into problems with serious debtors, who repeatedly and consciously fail to up even when not faced with financial difficulties&quot;, the collection agency said in a statement. Lobaciuviene plans to apply various non-traditional methods in her practice, including corrections to an entrepreneur's biofield, meditation and suggestive measures. The bureau announced having signed an agreement with Lobaciuviene, head of the Folk Medicine Center. The collection agency assures that none of the measures to be applied could have a negative effect on an individuals psychological well-being.
  32. 32. Financial Impact of Past Due Accounts <ul><li>Liquidity </li></ul><ul><li>Debt Covenants and the Bank </li></ul><ul><li>Factoring </li></ul><ul><li>Matching of Cash inflow and outflow </li></ul><ul><li>Do you have a policy for your allowance for doubtful accounts? </li></ul>(c) 2010 AlphaMac Resources, Inc. All Rights Reserved
  33. 33. Case Study #3 <ul><li>Your company is attempting to adopted a Best Practices model for their Credit & Collections Function. </li></ul><ul><li>As part of this model, you are constantly monitoring the payment practices of your customers. </li></ul><ul><li>On March 31, your Credit Manager comes to your office and shows you an analysis of your “best” customer, indicating that their DSO has increased by 15 days since the end of the year. </li></ul><ul><li>The Credit Manager asks you what you want to do. </li></ul><ul><li>How do you respond? </li></ul>(c) 2010 AlphaMac Resources, Inc. all rights reserved.
  34. 34. Case Study #4 <ul><li>Would your response from Case Study #3 differ if it was your “worst” customer? </li></ul>(c) 2010 AlphaMac Resources, Inc. all rights reserved.
  35. 35. Conclusion <ul><li>A/R is like any other Asset – Must be managed professionally </li></ul><ul><li>If you don’t have expertise in-house then hire an expert </li></ul><ul><li>A/R is the live blood of any company; treat it that way! </li></ul><ul><li>Topics discussed in the presentation have legal, tax and other implications to your business. You should discuss any actions you take with your legal, tax and financial advisors. </li></ul>(c) 2010 AlphaMac Resources, Inc. All Rights Reserved
  36. 36. Feedback <ul><li>Did we meet your expectations? </li></ul><ul><li>What other topics would be helpful? </li></ul><ul><li>Would you recommend this class to others? </li></ul>(c) 2010 AlphaMac Resources, Inc. All Rights Reserved
  37. 37. Additional Resources <ul><li>Graham-Leach-Bliley </li></ul><ul><li>HIPPA </li></ul><ul><li>Foreign Corrupt Practices Act </li></ul><ul><li>Truth in Lending Act </li></ul><ul><li>Fair Credit Reporting Act </li></ul><ul><li>Equal Credit Opportunity Act </li></ul><ul><li>Fair Credit Billing Act </li></ul><ul><li>Right to Financial Privacy Act </li></ul><ul><li>Consumer Leasing Act </li></ul><ul><li>Fair Debt Collection Practices Act </li></ul><ul><li>Unsolicited Credit Card Act </li></ul><ul><li>The Bankruptcy Reform Act of 1978 </li></ul><ul><li>Federal Consumer Credit Protection Act </li></ul><ul><li>Lots more – Talk to an attorney </li></ul><ul><li>AlphaMac Resources, Inc. 316.209.7400 – Outsourced Credit Operations, Credit Reports, Credit Insurance, Collection Agency Referral, Factor Referrals, and Development of End-to-End Policies and Procedures . </li></ul>(c) 2010 AlphaMac Resources, Inc. All Rights Reserved
  38. 38. Supporter (c) 2010 AlphaMac Resources, Inc. All Rights Reserved 6 Months Free Subscription if you mention this class.
  39. 39. Distributor (c) 2010 AlphaMac Resources, Inc. All Rights Reserved By Mail Alliance Training and Consulting, Inc. 8900 Indian Creek Parkway, Suite 270 Overland Park, KS 66210 By Phone US Toll Free: 877-385-5515 Local: 913-385-5515

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