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All you CFOs, CEOs, Owners of business, Presidents, Controllers, out there, do you know how well your credit, collections, accounts receivable department is doing? How do you measure productivity and efficiency? A common method is Days Sales Outstanding, (DSO), this is a formula that measure the average time an invoice is on the books before it is paid. Lenders like this formula because it gives them idea of how well the receivable is turning. The smaller the number the more frequent the turnover and thus, the better the chances the borrower will be able to make payments on the loan. However, what is in your opinion a good number? I recently spoke with a company that was not too concerned with its current 75 day DSO. Other companies I know would be enraged with that kind of a number, so what should it be?

How about collection percentage? I don’t see many companies measure how much of the receivable is collected from beginning of the month until the end. I knew a lumber company that demanded a collection percentage of 80% or better. A ready mix company I know seemed perfectly content with 60%. A glass company I worked with condones less than 50%. What should yours be? Is anyone measuring? If not, why not?

The percentage of the receivable that is past due is another sign post. How much is too much? I’ve seen companies with over 20% of their receivables over 90 days past due. Is that a lot? What do you think it should be?

When should the first collection call be made? The day an invoice goes past due, or 90 days? What do you expect? If your terms are 30 days from invoice, should someone be calling on day thirty one, or is ok to wait until day 61 or even 91?

When should a customer’s credit be held for non-payment? Credit and sales people argue about this all of the time, but what is the opinion of you senior executives? I’ve seen customer get away without paying COD invoices for up to four or five months. When does your patience finally run out? Do you put them on hold or always go straight to COD?

How strictly should credit limits be enforced? How meaningful are they? How does your credit department calculate credit limits? How do the enforce them?

Do you use collection agencies exclusively, or attorneys, or both? How do you choose one over the other? How do you choose an agency or a law firm?

When should you write off an uncollectable account to bad debt? Here, the range is all over the map. I’ve seen accounts written off as soon as a lien is filed or thirty days after it is turned over to an agency. Others will keep an account on the books if there is the slightest possibility for some kind of recovery. What is the standard?

How many collectors should you have? I’ve seen four person groups for a six million dollar A/R and I’ve seen one or two person departments handling twenty million dollar receivables. How many is enough?

Who supervises cash application? Who should supervise cash application? Credit or Controller?

For you with multiple branches, should you have a credit person at each one, or does centralization work for you?

When do you file a UCC? Do you always obtain a security agreement? Do you insist on financial statements? Do you rely on them? Do you believe in them?

Do you always get a signed credit application? Do you do anything with it when you do? What credit reporting agency do you use? Do you clear references? How long does the process take? How long should it take? What are you looking for from a reference?

Do you take only checks for payment? Do you accept credit cards, wires, joint checks, checks by FAX? Do you have payment on line? How do you handle invoice copies? Online or mailed / fax hard copy?

What is the limit your credit manager can adjust as a credit without documentation? How many levels of management is in place to make a decision about a credit of under $1,000?

These are issues your credit group handles every day, if you cannot help them, who can?
If you need help answering these questions, Strategic Credit Management Solutions can help you. We can review your situation, make recommendations, implement solutions, train you group, and we’ll provide follow up as necessary. It doesn’t take long in most cases either. A couple of days to a couple of weeks and we can get you where you want to be going. Contact us a patrickpowers@sbcglobal.net and check out our website at http://powerscredit.com/. Your comments are welcome.