As soon as you have finished reading this, go through your ledger line by line and ask the person who receives your cheques, has it ever happened that a cheque arrived in where the name on the cheque didn’t exactly match the name on the account? If the answer is yes, then you don’t know who your customer is. I am sorry if I keep labouring this point, this is the foundation stone that everything else is built on and you have to get this right from the start.
Secondly you have to manage the ageing – the older the balances the less money you are going to collect. The areas of concern is the amounts that are outside agreed terms. On the oldest balances, if there is a payment plan in place and they are honouring the new agreement I would be inclined to treat these accounts as within terms – so focus on the others.
Thirdly, you have to manage the exposure – this is the highest balance the account can go to at a particular point in time. For a large company paying by cheque this point is one week after the month end – before the cheque has cleared and they probably have their stock for the current month, leaving you with a potential exposure of three months purchases on a 30 day account paying to terms.
The easiest way to manage this is to calculate your exposure on your key accounts every month. When that is established you can then look to ways of reducing this exposure the following are some ways this can be done:
1. Credit Insurance. You probably have insurance on every single one of your assets from cars to premises, yet the largest asset and the fastest depreciating one is in most cases left uninsured. I urge you to look at this as an option. There is a perception that if you can get insurance on a buyer, you don’t need it – in other words the Insurance Companies will only take on blue chip companies – this is not the case and they are prepared to write limits based on a number of factors. For large amounts it is the best way I know to let you sleep at night, knowing that as long as you comply with the rules you will be covered.
2. Discount structures. There are a number of ways you can arrange discounts with your customers that can partially and in some instances completely eliminate your exposure at specific moments in time.
3. Guarantees. There are a number of guarantees you can look for: Personal Guarantees, Parent Company Guarantees, Bank Guarantees all have benefits and pitfalls, knowing which one is appropriate is essential for your business.
4. Payment methods. Using instruments such as Letters of Credit and increase the reliance you can put on payment and as long as you perform your side of the deal, your payment is guaranteed on the agreed date.
There are lots more ways you can manage your exposure without reducing sales to potentially big buyers, it is in your company’s interest to know what these are and how to implement them. Failure to manage this area can prove extremely expensive.