Is It Time for an Accounts Receivable Makeover?
Accelerate Your Cash Flow Before Economic Uncertainties Take Their Toll
From a credit management perspective, there is considerable uncertainty about the future as 2025 evolves. Inflation has moderated but remains persistent. Borrowing costs appear stuck at elevated levels with little hope they will decline significantly. The days of easy money are history, while market volatility has increased. Fluctuations in energy and commodity prices exacerbate cost pressures for businesses, impacting profitability and creditworthiness.
Underlying everything is the struggle low and middle-income consumers are having to make ends meet. Experian reports consumer debt in the United States rose 2.4% for the twelve months ending in October 2024 and is up nearly 14% over the past 5 years. Consumers are being forced to adjust their spending patterns, choosing to eat out less often in order to concentrate their spending on staples from the grocery store. For many, discretionary spending, such as trips to Disney, is out of the question.
The Impact on Business
Consumer trends have significant implications for small, as well as large, businesses. According to J.D Power, slightly over half of U.S. small businesses are financially distressed, and better than 6 of 10 of those businesses are carrying revolving debt on their credit cards—not a good sign. Not surprisingly, business failures are on the upswing. 2024 saw the highest number of commercial bankruptcies since 2010 with at least 30 companies that filed for bankruptcy in 2024 reporting liabilities in excess of $1 billion.
The political and international environments are also contributing to economic uncertainty. Ongoing conflicts (e.g., Russia-Ukraine, Middle East) and rising protectionism are disruptive to global supply chains and trade flows. Trade policy shifts, such as increased U.S. tariffs on Chinese goods, further destabilize global trade and contribute to volatility in the markets.
Of course, not everything is bad news. The Financial and Energy sectors may benefit from deregulation in 2025, but then again, the Consumer and Retail sectors could face margin pressure due to tariffs and immigration policies. Manufacturing continues to show signs of weakness in the U.S., while other sectors like technology benefit from increased investment. Compared to Europe, however, the U.S. is doing well, but the margin for error is dwindling. Any number of black swan events could plunge the U.S. economy into recession.
Credit Policy and Priorities
When the economic winds are shifting, or markets are subject to increased volatility, or you just haven’t done it for awhile, it’s imperative you reevaluate your credit policy and priorities. In last week’s post, we talked about credit policy. Periodically revamping your policies to reflect the economic headwinds facing your company provide downstream profit protection and cash flow benefits.
This article looks at the the immediate steps you should take to protect the value of your accounts receivable (AR) and protect your cash flow. By giving priority to your collection efforts, getting rid of the deadbeats, and leveraging new order approvals a company can realize near term cash flow benefits while updated policy strictures ensure future AR performance success.
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Power-up Your Collection Efforts . . . Now!
Changes to your credit policies will take time to have a positive impact. Putting an emphasis on collections will generate cash flow benefits in the first month as well as reduce bad debt losses down the road. Here’s five tips for powering up your collection efforts:
Make sure you have the right people handling collections. The first qualification is being comfortable asking for payment, followed by being accepting of the challenge. On top of that, the people handling collections need to be polite and project a professional decorum in their treatment of customers. Consider refresher training to upgrade collection skills.
Ensure you have enough collectors to adequately cover your customer base. A good collector can handle a 600-1,200 customer portfolio, assuming there is a normal distribution of large, medium, and small accounts; there are not widespread product performance, service delivery or invoicing issues; and you are using collection software, not just your ERP system. In a manual environment collectors may only be able to handle 200-400 accounts. In additional, smaller firms may need to spread the collection burden among several people, who also have other responsibilities beyond credit and collections.
Communicate the emphasis on collections to all customer-facing employees so everybody is aligned. Also, enlist the involvement of Sales and Customer Service personnel to provide a united front and assist in resolving disputes.
Establish Monthly Collection Targets for each collector. It’s not enough to just set objectives. You will also need to outline the collection strategies you will employ to reach your collective goals in respect to the collection workload and your resources. Lastly, consider offering bonuses or other incentives for those who meet and exceed their goals.
Equip your collectors with accurate and easily accessible information on the status of customer accounts. Most ERP and accounting software solutions have AR modules that provide this intel. Besides automating workflow, collection software tools deliver increased customer visibility and transactional transparency.
Get Rid of the Deadbeats . . . Now!
Over time, your customers will demonstrate their true value to your company. Getting rid of accounts that require excessive collection efforts can significantly increase composite customer profitability. This doesn't necessarily mean stopping sales to these deadbeats—revoking their credit line and requiring payment by cash or a credit card at the time of the sale will benefit your cash flow without taking on credit risk.
In most AR portfolios, there are accounts that are essentially non-performing. Their past due balances have reached 120 days or more, and your collection efforts have not moved them closer to making a payment. Rather then spend an inordinate amount of time chasing these debts, let a collection agency or attorney do the work for you, while you concentrate on the customers you can readily influence to pay. The sooner you can turn your over 120 day accounts to a third-party collection partner, the better.
Leverage Order Approvals . . . Immediately!
The more leverage you have, the easier it is to get a customer to pay. When a creditor holds a personal guaranty or UCC filing, the customer has greater incentive to pay in order to avoid the creditor exercising their rights than if they bought on open credit terms. Such credit enhancement provide collectors with leverage.
When a customer is sold on standard, open terms, creditors have the most leverage when the customer wants to make another purchase. This allows you to trade products or services for payments to accelerate cash flow. For customers who are significantly past due on their payments to your firm, trade order releases for either payments or promises to pay depending on the customer’s credit worthiness. Here are three tips for getting maximum cash flow benefits when new orders are placed:
Inform all customer-facing employees of your credit hold policies. Sales, customer service, and other order takers can help you collect if they know the customer is past due and orders will be held. Provide these stakeholders with a list of accounts whose orders are subject to holds. Then they can transfer the customer to you when a new order is being placed. Customer purchasing agents can be very helpful in freeing up payment from their AP departments.
Ensure you have an air tight hold process (automated preferably), so that every order is held until a check of the customer’s receivable status is made. If the status is satisfactory, release and process the order promptly. If the customer has significant receivables more than 15 to 30 days old or the new order significantly exceeds the credit limit that has been assigned to the customer, have a discussion with the customer about accelerating payments.
Inform past due and over-limit customers that their orders cannot be released until a substantial payment is received or promised to be paid immediately. If the customer has a history of breaking promises to pay, or a promise is made for more than a week away, you should wait until the money is received before releasing the order. If the customer has any history of bad checks, wait until their payment clears (your bank can tell you) before releasing orders. It's tough stuff but necessary.
Bottom Line . . .
Economic uncertainties complicate credit risk assessment and management. Your policies and priorities cannot remain static in a dynamic economic environment due to the following:
Increased Credit Risk: Businesses face heightened risks of nonpayment or delayed payments due to financial strain on customers.
Unpredictable Cash Flow: Volatility in interest rates and inflation affects cash flow predictability for both lenders and borrowers. Supply chain disruptions also impact ordering patterns, credit extension and cash flow.
Need for Proactive Strategies: Credit managers must adopt flexible policies, monitor economic indicators closely, and diversify credit exposure to mitigate risks effectively over the long term. In the meantime, an increased emphasis on collections, getting rid of the deadbeats, and tighter credit controls regarding order approvals will deliver near term results.
By understanding these uncertainties and adapting your strategies accordingly, businesses can better navigate the complex economic landscape of 2025.