Establishing efficient accounts receivables process is crucial for the effective management of working capital for small and medium enterprises.  The information generated from these processes is important to the management of cash flow and liquidity needs of a business.  If the organization has a high volume of transactions in accounts receivable, it makes sense for the company to pursue process improvements, standardization, integration and automation.

The Need for Positive Cash Flow

Accounts receivables represent the sales of the company which have not been paid.  They are recorded as sales transactions but payments are still pending.  A product or service has been sold but the company did not receive cash as payment.  A high volume of accounts receivables are usually common for a company accepting purchase orders and credit card payments.  When a company has several accounts receivables, this means an outflow of funds. A business needs a stable cash flow to generate working capital and profits.

In small to medium enterprises, the role of the owner or financial manager is to collect all the money owed to the business as quickly as possible.  This must be done while continuing to offer attractive credit terms to customers in order to increase sales.   The management of accounts receivables entails setting up reasonable credit policies including repayment conditions.  To motivate customers to pay their bill earlier than the due date, the company can offer an incentive or discount.  Customers are more likely to pay earlier to take advantage of the discount being offered.

Evaluating Credit Policies

A balance must be achieved between providing customers with generous credit terms and easier credit policies.  Before deciding to offer longer credit terms to keep customers happy, the firm must evaluate the current status of its working capital.  If the business can afford to carry accounts receivables for an extended period of time, longer credit terms may be offered.  The company should base its credit policy decisions on customer profile, timing of cash flow, risk of bad and credit industry standards.

Determining DSO

To evaluate the current financial performance, the firm must determine its Days Sales Outstanding (DSO).  The DSO is the average number of days of accounts receivables.  A high DSO means that the firm takes too long to collect outstanding receivables.  Maintaining the liquidity of the business is critical to be able to operate effectively.  Some companies choose to train employees in debt collection and credit policies.  Employees will know the importance of reducing DSO.  Improving a company’s collections process means high liquidity for working capital.

Acquire Information Systems Technology and Outsourcing

The development of financial technology systems and electronic systems has made it easier for companies to monitor their accounts receivables.  The automation of accounts receivable processes can bring many benefits such as enhancement of customer experience, increased productivity and employee morale.  The financial performance of the company will also be significantly improved with the optimization of accounts receivables.  Outsourcing financial and accounting processes is also an option for firms that find it difficult to develop their own systems.  The firm should be willing to take the risk of transferring sensitive data to third-party service providers.

If you are interested in outsourcing your credit control services in order to help improve your business cashflow, we would be happy to talk to you. Please contact us or call us on 0800 433 4113.

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Most organizations may have experienced collection problems especially if there is difficulty in establishing an effective collections team.  Many factors can cause collection problems such as poor management practices, untrained staff and insufficient systems.  The collections department of an organization may be having difficulty in getting support to change the current system of accounts receivable.  In other cases, the company may be understaffed and lack the manpower to pay attention to the past-due accounts receivable.  This is a common problem that may mean looking outside of the organization for help.

Outsourcing Using a Collections Agency

The company can address the problem by choosing to outsource an entire function of the collections department or only a few critical functions.  If the company decides to outsource, the accounts receivable aging report will be sent to a collections agency for turnover.  The collections agency functions as the outsourcing service provider by contacting all the customers of the company with past-due accounts.  Accounts that are 60 days old or whatever period specified by the company, are considered overdue.

The company is responsible for receiving the funds collected.  The collections agency may require a certain percentage from each invoice collected as a form of payment.  Other agencies are paid by the hour for their services.  It is wise for a company to continually measure the performance of the collections agency.  If the agency has a low percentage of invoice collection, switching to another agency is a good idea.

Things to Consider

Before planning to outsource collections, the company should consider the different factors.  One thing to consider is the cost.  There are costs to having an outsourced collections company but these have to be weighed up against the benefits that the agency can provide (staff that are trained & motivated to collect debts, the other better uses of your staff’s time in making money for you etc).  Another thing to consider is the efficiency of collections in the long run.  If the company plans to create an effective in-house collections department, staff should reinforce their training and skills.  Purely outsourcing the collections function will not solve the underlying problems that cause the customers of the company to miss payments.

Managing Credit Risk

In order to manage credit risk, a company will have to learn how to balance credit sales including the profits earned against the risk of granting credit to a customer.  There is no fool-proof way to manage these factors.  The right balance of credit risk depends on the strategic goals and profit margins set by individual companies.

One way to manage credit risk is to set a credit limit per customer type.  This should be standard for new customers.  The assigned credit limit should be based on the customer’s credit history including credit score.  If the company has high-risk customers, a special provision about a reserve for bad debt should be in place.  A payment schedule should also be set to ensure that customers will pay on time.  Consecutive late payments and delinquency should not be tolerated.  This will allow the company to manage credit risk more effectively.

The Cash Protection Agency is a debt collection agency offering debt collection and credit control services. We would be happy to help your company collect its debts and deal with any underlying issues in billing and collecting money from your clients. Call us on 0800 433 4113 or contact us online.

A credit controller is a person or external company whose role is to manage the employer’s creditors. Simply put, credit controllers chase customers for payment, perform credit checks on prospective customers in order to see whether there will be any risk involved in dealing with them and, on occasion, prepare paperwork for court hearings.

Many UK companies offer credit terms to their customers (some offer 30 days, some 60, some 90 etc). This can be beneficial to both the company and the customer as paying on credit helps the customer’s cashflow and enables them to buy more. The longer the company goes without getting paid, however, the worse this relationship becomes as the company itself can suffer from cashflow problems, it can spend unnecessary monies on debt collection and it can run the risk that the customer can go into liquidation before the company can get its money. Set against this background, a credit controller:

• Keeps in regular contact with debtors to ensure that they will pay on time or arrange a schedule for payment
• Keeps records of contact made with debtors to help businesses identify risky debtors and to provide an audit trail for any legal action that might be necessary down the line
• Credit checks new customers to ensure that they are not payment terms that they can meet
• Identifies customers that a business might not want to have or might want to give restrictive payment terms to
• Resolves problems of missing paperwork for clients so that they can pay promptly
• Instructs debt collection firms or solicitors if payments are significantly overdue
• Deals with liquidators
• Works with and reconciles debts and the aged debt register
• Creates or improves a credit control process for the company that enables the company to identify why customers get into debt, what can be done to reduce problems and how it can be done systematically to save the company time & money
• Reports to management enabling management to take swift decisions on problem customers before those customers go into liquidation

Many companies have an in-house credit controller that works exclusively for the company. The Cash Protection Agency offers an outsources credit control service to companies that has proved extremely popular for small and medium-sized businesses. Rather than incurring the costs of a member of staff and associated training costs, companies send their aged debtors list to the Cash Protection Agency whose expert staff contact the people and businesses that owe the customer money in a way that ensures that outstanding debts are minimised and the relationship for the customer is maintained for the future.

Many small businesses struggle to get money in. Many businesspeople worry that conversations about money will affect customer relations and they feel that they are not the right people to recruit and train a credit controller as it is something that they find difficult. In these instances, an outsourced credit controller, in the manner that the Cash Protection Agency offers, gives the company peace of mind, saves them money and improves their cashflow.

If you would like to know more about what a credit controller does or if you would like to make use of outsourced credit control, please give us a call on 0800 433 4113.

If you have any comments or further questions, please leave them below and we’ll be happy to answer them for you.