-TRAF University-

• Executive Financial Summary: Ten ways to enhance your internal collections

• Quantifying Internal Collection Improvements: Privacy Notice

• The Value of Commercial Debt: The average recovery rate and the effect aging has on the value of debt.

• Days Sales Outstanding: How long does it take to turn your receivables into cash?

• Managing Cash Collections: Combining automation with smart management can turn debt collections into a customer-service experience.
  
  
  
  » Click on the tabs below to see all of the services TRAFGROUP offers:
  
  

It is said that a sale is a gift until you get paid. However, all of us in business have learned that prompt payment is not always the case. Accounts not paid within the terms set can have a negative impact on cash flow and days sales outstanding.

Here are ten ways to enhance your internal collections:

1. Contact Overdue Accounts Early And More Frequently

   There should be a collection policy in place that clearly outlines when accounts are to be contacted. An early call from a customer service representative or a reminder notice inquiring about payment will streamline any possible customer dissatisfaction and increase payments. No law says you can contact a customer only once a month . The old adage "the squeaky wheel gets the grease" has a great deal of merit when it comes to collecting past-due accounts. It's an excellent idea to contact late payers every 7-14 days. Doing so will enable you to diplomatically remind the customer of your terms of payment.




2. Be Consistent with Invoices and Statements

   If you don't have a systematic invoicing and billing system, get one. Many times the customer hasn't paid simply because they haven't been billed or reminded to pay in a timely manner . Consistent follow up is needed to ensure accounts don't get backlogged. This situation usually occurs in smaller or newer businesses where they're short on staff to invoice and bill.




3. Initiate a Defined Credit and Collection Policy

   A major part of your business is your accounts receivables. Initiating a Defined Credit and Collection Policy must be a high priority for your business. One of the major causes of past-due receivables is that the business has not defined to both its customers and staff the terms of when accounts are to be paid. If you do not educate your customers that their accounts are to be paid on time, then chances are they'll pay late or sometimes not at all. Your staff should have a defined A/R follow up procedure in place (when to call, how often to follow up, etc .). Make sure that your company's terms of payment are clearly stated in writing to each customer. A payment policy letter to all new customers is a great tool to let customers know you are serious about your receivables.




4. Use Your Aging Sheet, Not Your Emotions

   You are in business to make money, not provide interest-free loans . Many businesses unintentionally let an account age beyond the point of ever being collected because they "felt" the customer would pay eventually. The truth of the matter is that they are struggling to pay bills and if you're not getting paid someone else is. Don't allow staff to overwork accounts; set a target date to write off accounts and place them with an agency.




5. Update Payments Regularly

   Once a new customer is obtained, it is vitally important to maintain accurate and timely records on their payment history . If you see any deviation from past payment patterns and, especially if payments become unusually slow, immediate follow up is warranted. This not only gives you an early alert to impending payment problems, it also gives you the chance for early intervention if there is an outside influence.




6. Properly Train Your Staff

   Even "experienced" staff members can sometimes become jaded when dealing with past-due customers. This usually occurs when they have made and broken promises for payment. Make sure the staff is firm, yet courteous, when dealing with them. Your collection staff could benefit from customer service training because, in effect, they must "sell" your customers on the idea that you expect to be paid . Continuous training seminars are offered through various industry groups. Make sure that your collection staff is trained to not only bring the account current; customer retention is of paramount importance as well.




7. Quickly Rectify Billing Errors

   Sometimes your customers do not pay because they feel you have made a mistake . Unfortunately, many customers believe that "the owner/president doesn't need the money". Denying an obvious error only fans the fire of resentment your customer may already feel. If the basis of the non-payment is a dispute over the quality of your product or service, a mutually agreeable settlement between you and the customer should be arrived at promptly. The customer may use a minor dispute to withhold substantial payment. Insist that the undisputed portion get paid immediately, indicating the balance will be negotiated. This will not only help to collect payment; it shows the customer that you are listening to his or her concerns.




8. Every Account is Not Collectible

   Even by setting up and adhering to a specific collection plan, there are accounts that will never be collected. By identifying these accounts early, you will save yourself and your company a great deal of time and money. Even though a few may slip by, you'll find that overall the number of slow pay and nonpaying accounts will greatly diminish and that's a victory in itself !




9. Use Third Party Influence Earlier

   If you've systematically pursued your past-due accounts for 45 to 60 days from the due date, (and they still haven't paid, you're being delivered a message by your client. More than likely, you've requested payment four to six times in the form of phone calls, letters and statements. Statistics show that after 60 days, the effect of in-house collection efforts wears off 80%. That means that the time and financial resources budgeted for collection efforts should be focused within the first 60 days where the bulk of your accounts can and should be collected. From that point on, third party pre-collection services such as those provided by the TRAF Group can motivate a customer to pay in ways you cannot simply because the demand for payment is coming from someone other than you.




10. Maximize Your Internal Collections

    The best and easiest way to maximize your internal collections is to let TRAF Group's accounts receivable management team handle your accounts. We offer a full range of services throughout the entire revenue cycle. We will improve your cash flow along with your customer relationships. Let us show you what we can do!

"Companies don't always grasp the importance of faster collection of outstanding receivables", notes Mike Farrell, National Director Business Development for the TRAF Group, Inc., an accounts receivable management solutions business headquartered in Lawrenceville, NJ. 

"Instead, managers focus corporate resources on boosting sales because the benefits of higher revenues are easier to quantify. Collection inefficiencies or problems are often ignored by executives who don't know how to assess their cost to the company's bottom line. But, it's possible to quantify the benefit of faster collection in terms of dollars saved", says Farrell. 

Here's how to do it:

By following the formula below, you can calculate the dollar savings from each day's improvement in the speed of your average accounts-receivable collection. Faster collection means that your company won't have to use its credit line (or corporate credit cards for that matter) while waiting for customers to pay.

Post the formula on your company's bulletin board so that no one -- least of all you -- can overlook the benefit of a swift, efficient collection system. Once you know exactly how much your company stands to gain from faster collection, you can see if it's worth investing in top-notch collection software, hiring additional full-time accounts receivable clerks or outsourcing a portion of your accounts receivable to trained professionals. When looking for ways to collect receivables faster, take note of every possible source of improvement.

“Many executives assume that the only way to boost collection is by hounding their customers more often. But, they can save days in a lot of different ways", notes Farrell. 

"You can often improve collection just by changing your terms and conditions of payment. So remember that you've got a range of options, all of which can have a positive impact."

FORMULA: Gross annual sales x annual interest rate x days saved (based on 365 days/year)= dollars savings

A. Use last year's sales numbers (unless your company is growing rapidly and you've got a good projection for this year).

B. TRAF Group tends to plug in the prime rate for "annual interest rate," which was 4.50% at press time. Companies with higher borrowing costs should use prime plus 1 or 2 points.

C. To find "days saved", subtract your company's improved days sales outstanding (DSO) from its original DSO. If you don't know how to figure your DSO, here's a quick calculation:

Divide your NET SALES by the number of days in the period. This could be the whole year’s sales. So….if your sales for the year were $100,000, divide 100,000 by 365 = 273.97.

Next, take the above figure (273.97) and divide it INTO your accounts receivable balance. Let’s say you have an A/R balance at the end of the year of $8,000. You would divide 8000 by 273.97 = 29. So….your DSO would be 29 DAYS. This means that on average, for the entire year, your customers held on to your money for 29 days.

D. "Dollar savings" is the number you care about. Look for ways to keep generating new dollar savings from whatever improvements you can make in your collection system.

Here's the best news of all…….no matter how small your company or its DSO improvements, you can still save money. A $10 million company, borrowing at the prime rate, that makes its collection four days faster would save $9,589. A $3 million company that improves its DSO by 15 days (a realistic goal for companies that haven't actively managed their collection effort) would gain $10,788.

Time is of the essence when placing an account for collection. The older an account ages the lower your chance of recovery, and as the age of the account increases the success of recovery decreases.

The Chart below shows the average recovery rate as calculated by the Commercial Law League of America on the effect aging has on the value of debt. The age of each account determines the value.

What is DSO?

Your DSO ( Days Sales Outstanding ) gives you your average collection period, or how long on average it takes you to turn your receivables into cash. Your average collection period is the number of days, on average, it takes your customers to pay you. Your DSO may be a reflection of several things - your credit policy is one example. A liberal policy, providing relaxed credit standards, will usually generate higher sales volume and a longer average collection period. General economic conditions as they affect the finances of your customers and their customers will affect your DSO as will the attractiveness of any discounts you offer for prompt payment and the diligence of your collection efforts.

In short, regular DSO measures the time it takes to collect your receivables and provides an understanding of your company's internal collection efficiencies. To calculate your DSO, you need three pieces of information:

1. The number of days in the sales period to be analyzed

2. Total accounts receivable (how much money is owed to your company now)

3. Total credit sales for the period analyzed

Notes:

Your receivables figure should include only credit sales; cash sales should be excluded. This figure should represent receivables resulting from sales of merchandise or service only. Amounts due from the sale of equipment, real estate, etc. should not be included.

"Days in sales period" is defined as follows:

Year = 365 days

Six Months = 182 days

Quarter = 91 days

How to Figure It:

1. Divide your NET SALES by the number of days in the period. This could be the whole year's sales; so, if your sales for the year were $100,000, divide 100,000 by 365 = 273.97.



2. Take the above figure (273.97) and divide it INTO your accounts receivable balance. Let's say you have an A/R balance at the end of the year of $8,000. You would divide 8000 by 273.97 = 29. So, your DSO would be 29 DAYS. That means that on average for the entire year, your customers held onto your money for 29 days.

Who Cares?

I hope it is obvious that the longer people hold on to your money, the more your business looks like a bank….except you don't charge any interest. So, you've got the worst of both worlds. You did the work, ugh. But they still have YOUR MONEY.

There have been numerous publications carrying stories on the early warning signal for investors--a company's DSO. If their favorite company was taking longer and longer to get paid, the investor often considered putting his hard-earned money elsewhere.

Combining automation with smart management can turn debt collections into a customer-service experience.

One of the primary goals of a successful credit manager should be to harness relationship building. If your collection staff can build a rapport with their customers, and maintain a healthy working relationship, they will be much more effective when they try to work with a customer who is past due. If you are proactive and contact your customers early in the collection process, with a sense of customer service, rather than hard-core collection tactics, you will be more likely to build a positive working relationship.

For this philosophy to succeed, it's important to provide accurate, easily accessible information for the collectors. This will allow their collection activity to be informative and productive. The best way to achieve this is by using an automated system.

Using automation, you will be able to monitor and manage goals such as reducing DSO and outstanding disputes while instilling customer service methodologies. By saving the collector's time and providing them with the appropriate tools, you are giving them the opportunity to transform how you manage your working capital.

If the credit manager employs a customer-centric approach, there is an enormous opportunity to decrease outstanding disputes and lower your DSO. Without an automated system, collectors spend an extraordinary amount of time collecting money using paper-based systems and it is extremely inefficient. Automating collections puts the focus where it belongs…..on personal collections and credit decision-making.

Automation translates to structure and organization. Credit Managers should be spending time with their customers, or analyzing data, instead of sending faxes, emails and reminder letters. These types of activities can be accomplished faster, and better, with an automated tool. Using a system that offers a strategic approach, you will be able to configure the system to follow a path of activities. For instance, on Day 1 it may send an email, then on Day 5 a fax with a copy of the invoice, then on Day 8 a letter and then on Day 10 it may create a call and place it in a specific collector's queue. This type of management cannot be achieved manually.

If left up to the manual process, this set of activities will not be executed and tracked with the same precision and the collector will not have any time left to deliver customer-oriented services. For instance, if the collector is spending his or her time prioritizing, scheduling, checking, and re-checking, they are not working on dispute issues and they are not developing relationships.

Without an automated system, this proactive method of increasing cash flow may seem daunting. It would require a constant evaluation of accounts as well as lots of time at the fax machine. Even if this plan were put into place, the reality of keeping up with the procedures is unlikely.

In a manual system, the contact phase is primarily a one-customer-at-a-time proposition. The only exception to this would be the ability to process statements and past-due notices. Manual contact activities include:

• Sending letters, faxes, and emails
• Making phone calls
• Identifying and resolving problems
• Leaving messages
• Recording discussions and actions taken
• Scheduling follow up using a calendar or tickler

By implementing an automated collections and dispute management system, information that is normally scattered among several employees will be funneled into one source. As the automated system operates, it tracks, records and monitors its own progress providing employees with useful information.

By instituting strong and reliable strategies and implementing automated tools, you will be able to streamline the collection process and reduce outstanding disputes while uncovering areas that are in need of improvement. These benefits will translate to value, not only for your organization, but also for the customer.

If it is determined that many disputes take place due to pricing inconsistencies, what does this tell you? Perhaps there is room for improvement within the sales process involving the pricing structure, or communication methods being used to convey pricing to the customers. With a clear picture of disputes, and their causes, changes can be made and ultimately a better service or product can be offered, making the organization stronger and the customers more loyal.