After reading this month's ProSales Accounts Receivable Survey, I am amazed at how our dealers have tightened up the belt one notch as they come off of high-times.
Of the 284 respondents, most leaned toward tightening up on credit. While only 35.7% of the respondents increased the amount of time or the amount of people to collections, 59.9% have become slightly more engaged or significantly engaged in collections as compared with last year; it seems like we are working harder with fewer people. We should, of course, given that the average days of accounts receivable moved from 43.98 days to 46.62 days.
I initially felt pain for dealers in learning that 74.7% of the respondents accepted credit cards-paying 1% to 4% in credit fees to the provider has to hurt. Then, as I read through the survey, I realized that with the tightening up of credit, paying these fees can be a positive because they allow the dealer to collect the money owed. For more general information about credit cards in our industry, see the ProSales Credit Card Survey results. This one found that 28% of the participants allow computer transfers. This number is higher than I expected, but an advantage over waiting for checks in the mail.
As you look for ways to tighten your belt, consider my selection of the top five general responses from the survey that you can consider for your operation. I have modified these slightly to make a point and added five more of my own.
- Closing all accounts that are 60 days past due.
- Kill commissions for any outside sales that are unpaid after 90 days.
- Require a personal guarantee on new credit applications.
- Have your credit manger join the local National Association of Credit Management chapter. That way, you are much more aware of who is in trouble. (In response to option 4, I have had an opportunity to join a dealer at a monthly credit meetings. I often wonder about the troubled contractors whose names are circulating around the NACM meeting - the dealers that are not present may lose out, extend credit, get burned by the failing builder.
- If cash flow is tough, consider BlueTarp Financial or some other company that can manage the collections for you.
- On all new accounts, have the credit manager meet with the accounts payable department of the construction company reviewing terms. By knowing the terms up front, there should be fewer excuses for missed payments.
- Place your receivables balances in an aged-accounts spreadsheet or run a report that weights each column by the number of days due. I often refer to this as Credit Risks, meaning the longer somebody owes you money, the less likely they are to pay and the more time you have to spend on these accounts. For example if a customer owes you $1,000 in 30 days, this would rank as 30,000 in risk. Once you have multiplied this out, rank them in descending order by relative risk and then work the top 10 to 25 accounts.
- Look at GMROAR-gross margin on accounts receivable. This is the average number of days to pay multiplied by the margin. If your builder stretches you out for payment, you need to get a higher margin. Should your builder beat you up on margin, request a five- or 10-day payment period. This is similar to GMROI (gross margin return on inventory), but uses accounts receivable as opposed to inventory in the analysis.
- Be consistent and persistent in your collection policies. If your terms are due by the 10th and you have not received a payment by the 15th, then call the customer. If there's still no payment by the 20th, send a letter. If no payment by the 30th, then send another letter. If no payment by the following 10th, assess a service charge, including a minimum, and close the account. This may seem to be a little too aggressive, but if everybody is asking for money, then the supplier that is most persistent will probably get the funds.
- While your sales people should be selling, get them involved in collections when you have over 30 day accounts. Since they have the relationship with the builder, they can open the door. Also, playing good cop/bad cop also works when you have no other alternative to collecting funds.
Each day that you reduce your DSO (daily sales outstanding) or your average collection days, you are freeing one day of cash for which you are not paying interest or you can gain interest on the account.
In addition to improving DSO, writing off bad debts is like throwing money out of the window. If you don't have to write off 1% of sales for bad debt by tightening your belt, then you have just added 1% to the bottom line.