Credit/sales approval supports the sales process, but that's just the first step in the sales-to-cash cycle. Profitable sales cannot be achieved unless payment is received. A funny thing about selling on credit is that when you don't send an invoice (or send one that makes no sense), most customers won't send you money. The goal of billing is to facilitate payment, and to do so the billing must be timely, accurate, complete (according to the customer) and understandable. Finally, invoices and the original credit terms should reflect a late charge for late payments. If there is no late charge, there is no set term for payment, and no motivation on the part of a customer to pay on time.
At this point, the sale has been motivated by enlightened credit management; an order has been received; goods shipped or services provided; and an accurate and timely invoice placed in the customer's hands. A profitable sale is almost within grasp and will be achieved once this invoice has been paid. The gross margin, as calculated from the invoice, is now at its highest point, but will deteriorate slowly as time passes and the customer fails to pay on time. However, what cannot be stressed enough is that A/R Management is not "collections", the enforcement of payment. Collections is what collection agencies and attorneys do. They deal with "debtors", not customers.
A/R Management is "the completion of the sale". The primary goal is to keep customers current and buying, and in that process is crucial to achieve one of the most important underlying goals: the stimulation of repeat sales. The last thing smart companies want to do is create an impediment to lucrative, repeat business.
The secondary goal of A/R Management is the early identification and control of the small percent of credit customers who represent a potential for loss. Every past-due customer will fall into one of three categories.
Type 1: Slow Pays. Some customers practice tight cash management and deliberately pay late. Other customers may be disorganized, lazy or indifferent to paying on time. These are customers whose business is desired and profitable.
Type 2: Problem Accounts. The problem can be something going wrong or the customer not having the ability to pay. System problems, or things going wrong often make up the largest percent of all past dues. Financial problems are either short term (temporary) or long term (serious). We want to work with the financial temporaries and encourage their continued business and we want to cut off further credit to the financial serious who represent a 90 percent-plus risk of failure.
Type 3: Avoiders. This type of customer is constantly trying to beat you out of your money. It is also the smallest percentage of all past-dues. Rather than wasting time (your most precious resource) fighting for payment, cut off credit and refer this account to a "real" collector; an enforcer of payment.
At this point, the sale has been motivated by enlightened credit management; an order has been received; goods shipped or services provided; and an accurate and timely invoice placed in the customer's hands. A profitable sale is almost within grasp and will be achieved once this invoice has been paid. The gross margin, as calculated from the invoice, is now at its highest point, but will deteriorate slowly as time passes and the customer fails to pay on time. However, what cannot be stressed enough is that A/R Management is not "collections", the enforcement of payment. Collections is what collection agencies and attorneys do. They deal with "debtors", not customers.
A/R Management is "the completion of the sale". The primary goal is to keep customers current and buying, and in that process is crucial to achieve one of the most important underlying goals: the stimulation of repeat sales. The last thing smart companies want to do is create an impediment to lucrative, repeat business.
The secondary goal of A/R Management is the early identification and control of the small percent of credit customers who represent a potential for loss. Every past-due customer will fall into one of three categories.
Type 1: Slow Pays. Some customers practice tight cash management and deliberately pay late. Other customers may be disorganized, lazy or indifferent to paying on time. These are customers whose business is desired and profitable.
Type 2: Problem Accounts. The problem can be something going wrong or the customer not having the ability to pay. System problems, or things going wrong often make up the largest percent of all past dues. Financial problems are either short term (temporary) or long term (serious). We want to work with the financial temporaries and encourage their continued business and we want to cut off further credit to the financial serious who represent a 90 percent-plus risk of failure.
Type 3: Avoiders. This type of customer is constantly trying to beat you out of your money. It is also the smallest percentage of all past-dues. Rather than wasting time (your most precious resource) fighting for payment, cut off credit and refer this account to a "real" collector; an enforcer of payment.
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