The Best of Your Virtual Credit Manager: 2021
The Importance of AR Management, Access to Reliable Data, Credit Applications, and the Benefits of Credit Insurance
Editors Note: The readership of Your Virtual Credit Manager has been accelerating, so we thought it might be beneficial to both old and new readers to summarize the 4 posts that received the most attention last year. We’ve also included links to the full articles, which are preserved in the YVCM archive. Enjoy!
Why Is Managing Accounts Receivable So Important?
If you sell to other businesses, they are going to expect credit terms, which vary by industry, though in many cases open terms stipulate 30 days before payment is due. In this B2B model, there is a always the risk of never being paid, or of being paid well beyond the terms. A large proportion of delinquent AR can be devastating to your business. You may run out of cash, and not be able to pay your your suppliers, your employees nor yourself. Under performing AR can create a cash flow crisis that can shut down your business quickly.
For most B2B companies managing AR is a critical function. As revenue grows, AR management becomes more important as do a company’s cash needs along with the impact of poor AR management.
Getting Off to a Good Start with Your AR Management
Unless you have a relatively small number of customers who are financially strong and pay on time, you will need to develop an AR Management capability. The two most important functions are:
Credit Risk Management involves investigating (vetting) and monitoring the financial strength of your customers to ensure they have the financial resources to pay your invoices on time. For more information about process credit applications click here and evaluating credit click here.
Collections involves reminding customers to pay when they have missed an invoice due date. For more information about collections click here.
What you don’t want to do is leave credit and collections to chance. The vast majority of B2B enterprises need to judiciously manage their AR, even when they are a small enterprise. The risk inherent in the extension of credit and the critical nature of cash flow is too great to ignore.
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Is Your Customer Data Reliable and Readily Accessible?
All business decisions require actionable data, especially when credit and collections is involved. A high degree of transactional transparency across the entire Order to Cash Process (O2C), coupled with 360 degree visibility of customers and their life-cycles is necessary to achieving maximum accounts receivable (AR) performance.
In too many organizations credit and collection decisions are compromised by the fog of war. Gathering all the details needed to inform a decision becomes a time eating burden. To make an effective collection call you need to know who to contact, the AR status and AR details of the account, if there are any disputes, and what prior efforts have been made to collect the balance due … but what if that information isn’t in one place? Credit approvals also get delayed due to the time it takes to research all the details.
You Can't Manage Credit & Collections in the Dark
The accumulation, updating, storage, protection, and retrieval of Customer, Credit, Sales and AR data is central to your revenue producing and cash generating operations. The five primary categories of information required to effectively manage the O2C process and assure optimal AR performance are:
Customer Master File: mostly standard account details
Credit Profiles: for all customers
AR Records: including every open and closed transaction for every account
Sales History: both volumes and product lines
Customer Contact Logs: both sales/customer service and credit/collection
Top 10 Reasons to Have Your Customers Fill Out a Credit Application
Asking a client to fill out a credit application is the first step to offering credit terms. But the question is why do you need them to do this in the first place?
To answer that question, we’ve compiled a Top 10 list of reasons to have your customers fill out a credit application:
The First Step Towards Knowing Your Customer. A credit application helps sellers learn as much as possible about their customers before making a decision to extend credit.
A Window Into the Customer's Ability to Meet Its Credit Obligations. A credit application allows the seller to make informed decisions about a customer’s ability to meet credit obligations.
A Limit on the Seller’s Risk. An accurate and up-to-date credit application is one of the best ways to minimize risk.
A Way to Prevent Bad Debt Write-Offs. Requesting a credit application could save you many thousands of dollars in bad debt write-offs.
A Baseline for Evaluating Changes in Creditworthiness. Events in the lifecycle of any business can alter a company’s creditworthiness.
A Tool for Monitoring Changes. It pays to do periodic reviews, even on existing customers, so having customers fill out a credit application and then checking their references one time is not enough.
A Legally Binding Contract. The agreed upon terms, conditions, the guarantees and the electronic signature on a credit application make it a legally binding contract and will make a significant difference in the collections process.
A Means for Improving the Cash Flow for Your Customers. Many businesses are not able to receive the bank funding they need and that prevents them from growing their business. You might be able to help by granting open credit terms. If they thrive, you will thrive.
A Lifetime Reference File. A good credit application can be referred back to again and again -- sometimes years or even decades later.
The Best Tool to Use When a Customer Requests a Higher Credit Limit. When a customer’s sales increase in size and speed, it is a good opportunity to check their credit and have them fill out a new application.
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Is Credit Insurance Right for Your Company?
Trade Credit Insurance, also known as business credit insurance or export credit insurance, is an insurance policy that protects accounts receivable while also offering significant ancillary benefits. The protection provided by a policy equips businesses with the confidence necessary to extend credit to their business customers, enter new markets and increase sales to existing customers. With a Trade Credit Insurance policy in force, a company can safely offer open account credit terms ideal for creating a positive Customer Experience.
How Credit Insurance Works
Policyholders request coverage on their buyers (customers)
The credit limits requested will be approved, partially approved or refused
Business continues as usual
Portfolio monitoring is handled by the insurer
Vetting new prospects is handled by the insurer.
Making a claim is handled by the policyholder
Credit Insurance Benefits
Loss Protection
Peace of Mind
Increased Competitiveness
Funding Facilitated
Enhanced Working Capital
Greater Customer Insights
Drives Growth
Cost Effective
For startups and other smaller growth companies, there comes a point at which Trade Credit Insurance becomes a viable option for cost effectively managing a very significant portion of the credit function. This is especially true for small businesses involved in exporting. Exporting on open terms is quite simply much riskier than domestic sales.
The key to reaping the benefits of Trade Credit Insurance is to work with a savvy broker who endeavors to teach their clients how to leverage their Trade Credit Insurance policy. It’s an economical investment which pays for itself in saved expenses and safe credit sales growth.
About the Founders of YVCM
David Schmidt: He is Managing Director of A2 Resources, a consultancy focused on credit, collections and AR automation. A 40+ year business credit executive he is co-author of “Power Collecting: Automation for Efficient Asset Management”(Wiley).
John Salek: President of Receivables Management Associates, John has 33 years experience helping over 250 companies improve their AR Management. He is author of "Accounts Receivable Management Best Practices" (Wiley).
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