As a business professional, you understand how important working capital is to your company’s financial health and growth strategies. But let me ask you this; How important is your accounts receivable? Hopefully your answer is “very important” because accounts receivable is one of the best and most accessible sources of working capital a company has; you’ve already earned it, all you need to do is collect it! For many companies though, collecting invoices is easier said than done but by implementing best practices in working capital management, you can quickly and easily turn those outstanding invoices into the capital you need to grow.
Accounts receivable truly is an issue. According to recent industry studies, roughly 39% of invoices in the US are paid late, usually in a time frame more than double the agreed upon terms; and businesses write-off 4% annually due to poorly managed collections. Focusing on your accounts receivable process is among one of the most successful best practices in working capital management.
On the surface, the 4% written of mentioned above does not sound too terrible, but think about this: for a $10m company, 4% is actually $400,000 written off each year. That is a significant amount of money! By reducing write-offs by only 10% the same company could save $40,000 each year and use it to grow their business.
BEST PRACTICES FOR WORKING CAPITAL MANAGEMENT
So, how do you do it? Follow these best practices for working capital management to make sure you’re saving every penny instead of writing them off.
DO YOUR HOMEWORK
The first step to getting a hold of your working capital and get on top of managing it correctly is to do a little research. It might sound silly to do research on your own company, but it’s good to take a good hard look at who your customers are and what your key metrics are every once in a while. All of these should be hashed out so you can build goals and a process. Make sure you have written down where you’re currently coming in at for collection effectiveness index, DSO, average days delinquent and write offs. Do some research into your industry and when you stack up compared to the industry benchmark for these key metrics.
CREATE A MISSION STATEMENT
Creating a mission statement for your credit and collections department helps to align your team members to what the overarching goal of the department is. This goal is very high level, stating what your department hopes to achieve in broader terms, rather than concrete numbers (that comes later). This mission statement should be separate and different from your corporate mission statement, but still align to it with a similar theme. For example, one possible mission statement could be “To deliver accurate and timely information and friendly business credit services to customers delivering the best possible credit experience in the markets we serve.”
Now that you know where your company currently stands among your key metrics, and in comparison to the industry average, you should take some time to set up your goals. These goals should be SMART goals and should be a deeper dive into your collection department’s mission. SMART goals for working capital management are Specific, Measurable, Attainable, Relevant and Time sensitive. This means that these goals should be much more in depth than your mission statement, with specific numbers to work towards. They shouldn’t be a shot in the dark. Just because the industry average DSO is 40 percent lower than you, doesn’t mean you can reasonably achieve a 40 percent reduction in one month. They should also be relevant to your mission statement, as mentioned before, and have a date attached to them. Without a deadline, you will never see any urgency to achieve these goals. Some examples of SMART goals are to Reduce bad debt write offs by 3 percent in 6 months or Contact 70 percent of customers with a past due balance within 2 days of the missed invoice.
DEFINE ROLES AND RESPONSIBILITIES
Every person in the collections department should have a defined role. In order to better manage working capital and collect on what you are owed, you need people to know what they are doing and what they should be doing. Often times, if a role isn’t properly defined, team members will go with the “well, it’s not my job” approach and the task is never completed. Write down and inform team members on who is responsible for tasks like sending follow ups, reminder emails, collection letters, making follow up phone calls, managing invoice disputes, placing credit holds, deciding on credit limits for customers and more of the daily tasks in the department. By clearly defining these roles and responsibilities, you can ensure that every critical task that aids you in reaching your working capital management goals will be taken care of.
INVOLVE YOUR SALES TEAM
Payment and collection efforts are simply the final processes in the completion of each sale. Sales representatives should be talking to your customers more than your credit and collections department – let them proactively manage payments for their own accounts. This can take some of the heat off of your collections team when it seems like they won’t cooperate no matter what they do. The sales team itself tends to have a better relationship with the customer after spending weeks, or possibly months, working out the details of the sales deal. Allow them to leverage their established relationships to help out your collections team.
TAKE ADVANTAGE OF TECHNOLOGY
Getting all of these best practices done AND getting your normal tasks done, like sending out communications with customers and following up on overdue accounts, can seem like a lot of work. Thankfully, technology has become even cheaper and attainable for most companies. Accounts receivable management software helps to eliminate your team’s need to do manually tasks so they can focus more on attending to tasks that will actually help manage working capital, like creating, tracking and measuring goals and overseeing their specific roles and responsibilities.
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