Our new SMART system at The Credit Department (TCD) launched in December, and we’re getting SMARTer! 

In fact, the flexibility of this receivables workflow system is allowing us to provide sophisticated reporting beyond collections. 

One huge benefit is that TCD clients now know which customers are disputing payments and the dollars involved in the disputes.  Since credit managers don’t generally control these past-due dollars, a new tool exists for them to pinpoint these disputes and route the files to the internal departments that CAN control them.  

While it might seem logical to blame past due accounts on the efforts (or lack of effort) in the credit department, our SMART reporting results have shown that you should wait before shooting the messenger.  

After working the receivables of one client, we found that 30 percent of the total uncollected receivables involved some type of customer dispute. In addition, we were able to pinpoint the dispute to issues such as wrong products shipped and quality problems. Drilling further, we also determined that the majority of the disputes originated at a specific warehouse.  This was a surprise to the leadership of the company. They now had a way to measure the impact of these warehouse problems so they could correct the issues and eventually allow the credit department to collect money due.   

You can’t force a customer to pay for the wrong product or a damaged product, yet credit departments don’t have the authority to correct customer disputes. It’s usually very difficult for credit departments to measure exact dollars and reasons why disputes exist when they have hundreds or thousands of invoices to work.  Disputes need to move to the responsible people within the company, but that can’t happen until the information is available and clearly and consistently reported. 

If you would like to learn more about SMART reporting options, give The Credit Department a call. We’d like to save a few good credit managers from an untimely demise.  

In our next blog, we’ll provide tips on measuring the performance of your credit department by more than number of phone calls. 

You may be surprised to learn that many of our clients at The Credit Department already have internal Credit Departments either managing credit risk or handling collections for key customers. Why would they need us? 

There are actually several reasons that larger companies find value in outsourcing some of their credit and collections needs. These include handling special projects, in-depth analysis, third-party objectivity and enhanced shareholder value. Let me explain each of these: 

Special Projects
Sometimes our clients will delegate a portfolio of customers as an outsource initiative simply because it’s more cost effective to outsource than to expend time and resources internally. The accounts need to be cleaned up and managed, but are relegated to low priority due to other more pressing credit or collections responsibilities.  Outsourcing this task provides a tremendous return in terms of cash flow, identifying customer issues that will prevent late payment in the future and reducing bad debt associated with the portfolio. Our client in this case is the credit manager of the corporation. This person manages the engagement with our firm while we handle the execution of the resources needed to manage the portfolio. By setting and overseeing the strategy, the credit manager is still in control of the asset and knowledgeable about process and results. At the same time, he or she can focus on higher-level strategic work for the organization, such as large account management, setting risk/term strategies, and reporting results and concerns to senior leaders.  

In-Depth Analysis
After working with larger corporations over the years, we have found that their receivables software doesn’t typically provide the ease of analysis or reporting that we as a smaller boutique firm can provide. For example, we can gauge exactly how many customers were contacted in any one day and how much cash was promised. We can also report from our calls how many disputes exist, what types of disputes they are, and the dollar impact on the receivables. This level of specific reporting just isn’t available for an internal credit department without substantial investment in reporting software, training and access to data. 

Third-Party Objectivity
One of the results of this level of analysis is that we can make recommendations as an outsourced organization that might not happen internally due to priorities, lack of data, or politics. Our objective perspective is backed up by statistics that can be presented by the credit manager and department as convincing evidence to make real, positive process improvements in the organization.  Even if someone in your firm has been saying the same thing for a year, it’s always more convincing if a third party – backed by statistics — recommends it. For example, the credit manager may say, “Our outsourced collections group on this portfolio notes that 92 percent of our customers never reach our cap dollar amount for holding orders before they pay. Therefore, the group recommends that we change the hold policy to 30 days delinquent rather than a capped dollar amount to reduce bad debt and prompt payment.” 

Enhanced Shareholder Value
What does clear reporting, analysis and objectivity really deliver to a large internal credit department? How about more money? As every company is looking to reduce expenses and improve cash flow, ridding your credit department of collections backlogs and rising bad debt is a huge valuation booster. We’ve helped clients realize millions saved in write-offs that simultaneously helped them reduce bad debt risk and improve cash flow.  When your balance sheet is stronger, it makes shareholders, investors and lenders much happier. Your credit manager can also focus on more critical issues than 10,000 delinquent invoices that represent 10 percent of your portfolio by 80 percent of your past dues. From this perspective, outsourcing is a smart solution even for large companies.

It's a sad fact, but you can't trust your customers to be around tomorrow, even if they've been around for decades. One wrong decision on extending credit could wipe out your profit for the year.

For many mid-sized firms, it's cost-prohibitive to internally evaluate and monitor credit quality to the degree that an outsourced credit department can.  Some reasons for that have to do with the cost and access to the right information.

1. One-size fits all

Many companies will choose one provider to provide credit information.  This rarely works well to evaluate all customers.  D&B, for example, is excellent when seeking information on larger companies and in distinguishing which companies are related.  However, small company background and trade information aren't strengths of D&B.  Most creditors have a mix of small and larger customers, so they need a variety of sources to make good credit decisions.  This can get expensive if you contract with numerous (prepaid) sources on your own.

2. Public access limitations

A credit report has limited public records information.  It won't share, for example, that the owner just bankrupted a company last year and started this one up in the same industry.  Access to detailed public records is critical to making accurate credit decisions.  It takes several steps and safeguards for a creditor to be approved to access public records.  An outsourced credit department has this access.

3. Bank information

Too many creditors skip the step of obtaining bank information, but it's one of the most critical components to determining how much credit to grant.  Many companies don't bother because it's very difficult to obtain the information.  An outsourced credit department has many relationships and tools at its disposal to get bank information with extremely high success rates. 

4. Personal relationships

There is a large network of credit professionals across many industry lines.  If your credit department is less experienced or unknown to the credit industry, they may lack valuable contacts and information. Experienced credit industry professionals in an outsourced credit department have deep connections in the credit community and access to information from their colleagues and private financial sources that might never be shared publicly. These valuable relationships add to the knowledge base that can help you make more accurate credit decisions.

5. Talking the talk

Credit professionals know the lingo of data requests and how credit applications should be worded to get valuable information. You want a complete file at the beginning of a credit engagement so that it's easier later to track down any potential problems or collect what you're owed.

Forewarned is forearmed. Some of our clients still extend credit to a customer after we've recommended no credit. A business decision about a client is different than a credit decision. We know that there are other factors involved in extending credit, but the credit department's job is to point out the risks.   

A professional analysis supports successful risk management so that one bad client doesn't take your profits for the entire year.

If you think that your business is at a point of requiring a higher level of risk analysis and credit qualification, give us a call. 

 

The following is a true story of how an automated workflow system in accounts receivable potentially saved a company millions in bad debt and interest expense — and maybe even saved the company from disaster.

The Challenge:

In 2008, a privately held manufacturer selling to small companies, hospitals and universities had 75,000 unpaid invoices totaling around $13 million. About $2.5 million of this receivable was at least 90 days overdue.

When their Finance Department searched for answers from their local offices as to why customers weren’t paying on time, no one knew the answer. They didn’t know why customers hadn’t paid. They didn’t know when invoices would be paid. They had no detail on any disputes.  They didn’t know what arrangements had been made to pay down the account and how long the problem had been going on.

The Obstacles:

Within each location, people differed on their process of following up with customers – including how they tracked responses and when or if they decided to turn the invoice over to collections. Nothing was automated. Even sales people were following up on invoices. Payment terms were often dictated by customers. Simple notes were kept in the general software, but there was no automated follow-up or reporting on statuses of the files.

Solutions:

The company realized it needed to centralize its cash application, credit, billing, and collections functions.  They studied the options to build or buy technology and departments, but finally made the decision to outsource all of the functions except for cash application. They hired The Credit Department to manage the credit and collections process and to implement our custom technology solution to manage the process.

We dug into the records and realized that the company had no internal controls or segregation of duties, no training on collections and no understanding of why customers weren’t paying on time — which led to inconsistent reporting to the corporate office. In other words, the company didn’t have an accurate gauge of the true value of the trade receivables. There was no consistent strategy for responding to customer complaints or bankruptcies or the volume of 90 days past due invoices. 

After importing a simple list of all open invoices into our workflow system, we contacted every past due customer and assigned a status code to every single open item. We set up automated rules that assigned calls to every invoice that was at least 15 days past due, ordered follow up every 10 days, instituted hold orders and created collections notifications.

As with nearly every other receivables management function we’ve studied in the past 18 years, we found that collectors were spending nearly one-third of their time organizing the work.  The automated task lists instantly solved the issue of which customers to call on any given day;   productivity and results improved immediately. Then we started to get real answers to the Finance Department’s questions

Results:

We learned that about $100,000 in past due items were from customer complaints. We learned that some sales people were promising six-month payment terms. We learned that some items never arrived or that cash had been consistently misapplied.

Within six months, we had knocked $1 million off of past-due balances by establishing payment plans, aggressive collections and new hold order processes. While it was a culture shock to institute credit holds on customers, the extra $1 million in cash helped support this change.

To date, about half of the original invoices over 90 days have gone to third party collection agencies. With the implementation of credit checks and order holds, many fewer accounts with much smaller balances are going into collections. Automated workflow has been the key to managing the thousands of active accounts – and with just 2.5 people in the collections area. The company is now much more in tune with key business indicators in a more challenging environment as it reaps the benefits of an automated collection system.

Are You Still in the Dark Ages?

Like this company, do you need to take back control of your AR? You could put a bandage on the problem and hire a larger team to focus on collections without the automation, but you’ll probably end up in the same mess at a time when few can afford inefficiency. 

With our SMART software, we will soon offer an even more robust reporting environment that allows smaller and midmarket companies to manage their accounts receivable on the scale of larger  companies, but without the high price tag. Our clients will have their own portal to access the software online, work on files, keep consistent notes and automate follow-up so that they always know the status of an invoice at any time of day.

With a regular Internet browser, businesses can get a real time view of cash flow while supporting larger issues of quality, customer service, and profitability. An automated workflow system in accounts receivable would pay for itself within months. If you’re tired of spreadsheets, inconsistent cash flow, and incomplete receivables information, give us a call.