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Financial Aspects of Accounts Receivable Management:
Three basic strategies in managing cash and working capital that can be used by your company are:
1. Turn inventory over as quickly as possible without running into stockouts that hold up production or lose you sales
2. Pay your vendors (accounts payable) as late as possible without damaging your credit
3. Collect on your accounts receivable as fast as possible without driving good customers away by overly aggressive collection policies
Accounts receivable are considered “current assets” which means they will, or should be, converted within a businesses operating cycle. That may sound good but frankly accounts receivable tie up dollars that if freed up could be invested in earning assets.
Accounts receivable are a cost to a company – although a very necessary cost when you are engaged in an industry that extends credit to customers. I have been involved in three industries: health care, Internet and construction. Each of the companies belonged in industries that typically extend credit.
1. In health care we had to deal with insurance companies and government. Collection entailed providing information quickly and correct – negotiation on terms is not flexible. Typically, the patient was assessed a co-pay charge for the “visit” usually $10.00. We then processed the patient encounter forms, verified the procedures and diagnosis matched, verified patient and insurance information and then electronically submitted. When payment was received we verified payment, any contractual allowance write-offs were posted and the patient account was adjusted – with any necessary patient responsibility or other third party responsibility charged immediately. If there was a problem with the payment in any part of the process, follow-up with insurance companies, Medicare or the patient were made. Managing the day-sales outstanding and account receivable turnover was primarily making sure submitted information was correct.
2. In Internet we dealt with 10’s of thousands of customers that we extended credit on terms. Payment in theory was expected within 10 days. If the average customer did not pay within 30 days we would charge finance fees. If they did not pay by turn off date (45 days) their service was turned off. We would then go through the collection process, first internally then sending out to a third party agency. Managing customer expectations of their responsibility was the most important aspect of managing the accounts receivable.
3. In construction the customer is invoiced and is expected to pay within 30 days. Service charges are assessed for delinquent payments. This industry and the customers are educated on account receivable management and play the terms. Dealing with educated buyers is beneficial if handled correctly. Good customers do not want to be assessed service charges since they are costly to the bottom line. Financially, it is cheaper for the customer to access their banking credit and borrow the money then to pay service fees. Customers with poor credit will often pay outside of terms and pay the fees or attempt to negotiate out the service fees. Customers like this are shaky and need to be monitored closely. In New York construction companies can, and should make it a policy to, file mechanics liens. This is at least a stopgap in which property can be legally filed against to provide an asset “held” until payment is made.
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