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SUCCESSFUL ACCOUNTS RECEIVABLE MANAGEMENT:
How to minimize your bad debt.

As distributors desire to grow, they look toward ways of increasing their sales. However, if businesses fail to consider the importance of proper credit management, increased sales could actually lead to decreased profits. When selling to customers with poor credit, there is a strong possibility of late payments or even nonpayment. This can quickly erode profit margins. To put the importance of credit management in perspective, consider a corporation with a five percent profit margin before taxes. This company would have to make $200,000 worth of additional sales to make up for $10,000 of bad debt. Furthermore, if a business incurred the same $10,000 of bad debt on a one percent profit margin, it would have to make $1,000,000 worth of additional sales to break even. Through effective credit management, distributors can increase their sales while maintaining and even improving collections. Here are a few steps which can help accomplish this goal:

BE SELECTIVE WHEN EXTENDING CREDIT

Poor collections often result from customers with bad credit. Although offering credit to customers is typical in the distribution industry, not every customer is worthy of the same amount of credit or even any credit at all. Upon gaining new customers, businesses should perform credit checks and should not be lenient with a potential customer with bad credit. In instances of questionable credit, consider beginning with low credit limits and raising them when a good relationship has been established.

When a potential customer's credit is questionable, consider other measures which could help protect your company, while still accommodating the customer in order to make the sale. Such measures might include filing a UCC-1 or getting the personal guarantee of a small business owner, where these measures are appropriate.

STUDY YOUR ACCOUNTS RECEIVABLE AGING

Regular reviews of an accounts receivable aging can help owners spot potential problems before it is too late. By identifying patterns and trends, a good understanding of the customer base can be gained. This will establish a good understanding of the customers who generally pay on time and those who do not. Many accounting systems can also help with this function by tracking the average number of days outstanding and the average balance outstanding by customer. An increase in the volume of sales to a particular customer or in the time it takes a customer to pay should warrant a closer look at that customer's credit history.

When following up on past due accounts, use the 80/20 rule - call the largest outstanding balances first. This will concentrate collection efforts where they have the most potential for collections, rather than following an alphabetical list of receivables.

KNOW YOUR CUSTOMERS

Surveys have found that of the past due accounts receivable, 70% or more have not been paid because of a billing problem. These late payments can be eliminated by improving your invoicing system and knowing the business process and accounts payable system of your customers. To minimize payment delays due to billing errors and system problems, take the time to find out how a new customer does business.

• Make sure your customers are setup in your system with the proper information regarding their bill-to address, authorized purchasers and purchase order usage.
• Understand your customer's internal A/P approval system, A/P cutoff dates and policy on partial payments and/or partial deliveries.

Often customers may stretch out vendor payments as part of their standard cash management policy. Once these types of customers are identified, calling them early and often will speed up collections.

HIRE GOOD CREDIT SPECIALISTS

Many companies mistakenly view credit management as an enforcement responsibility or place collection responsibility with an accountant or sales person. The goal of the credit approval and collections process should be to maximize sales while minimizing risks. This can be achieved by hiring effective telephone communicators and training them to be friendly when making collection calls. Since many past due customers may just have temporary financial difficulties, a good credit specialist will help to get the bills paid while keeping these businesses as active customers.

CYCLE COUNTING CAN IMPROVE YOUR BOTTOM LINE

An accurate inventory is necessary for maintaining customer satisfaction as well as a company's bottom line. An effective means to attaining inventory accuracy is cycle counting. Many companies that employ this method have had success in maintaining an error-free inventory throughout the year. This year-round success can result in inventory accuracy of 95% or greater! However, some companies have tried cycle counting only to find it has taken more time and energy than they have to spare because it was not implemented properly. The following discussion highlights what can be gained from cycle counting and when it should be applied.

What can be gained? One advantage to cycle counting is error-free records. This can result in greater customer satisfaction and the ability to lower inventory levels. To get to this point, though, one must understand what cycle counting is and what it can achieve. The definition of cycle counting is to count a small percentage of pre-selected inventory on a regular cycle. A regular cycle can be every day or every week depending on the amount of inventory and labor resources. Samples counted can then be compared to inventory records to determine accuracy.

The overall objective of this procedure is to achieve an accurate inventory. The following must be done in order for the desired results to be achieved:

1. Keep the system up to date so the cycle count is accurate.
2. Ensure inventory records have a high level of accuracy.
3. Determine the reasons for errors.
4. Correct the situation that is causing these errors.

Sound easy? You are probably wondering the best way to approach cycle counting. The first step is to separate inventory into categories. There are various means of doing this; the best method for your company depends on how much and what type of inventory you have. The breakout of inventory will then determine how often you will count each item. A logical approach is to count your higher valued inventory more often because these items will have a bigger effect on the bottom line when it comes to shrink.

How many people will need to be devoted to this project? The number of personnel needed to perform cycle counts depends on the number of items to be counted, count frequency, number of storage areas, inventory accessibility, and the items' physical characteristics. Of course, a company's current labor resources have an obvious effect on how many people are available to cycle count.

Something to realize is that one of the big advantages to performing cycle counts and having a year-round accurate inventory policy is that employees have the opportunity to develop into specialists who are efficient and effective in achieving quality counts and reconciling differences. These employees can also be excellent resources for finding solutions to inventory errors! When a company performs only an annual physical inventory, most employees that are assisting with the count are unfamiliar with the items being counted and methods of counting. Often in this situation, as many errors can be introduced into the system as are corrected.

When is the best time to count? For best results, cycle counting should be done when all productivity has stopped. Obviously, this may not be an option for companies that have a 24-hour production period. This doesn't make cycle counting impossible, just a little more challenging. Having someone count after operational hours allows for the possibility of a proper cut-off which ensures that the goods on the shelf are available for sale and are also in the system. This allows for reliability when reconciling any differences.

Establishing a Cut-Off An important rule to follow to have an accurate cut-off is to fill all orders that are invoiced in the system. If an order is invoiced in the system, it is effectively reducing inventory for the sale that was made. But, if the order is not filled that same day, there will be more inventory on the shelf than what is in the system. This situation can also arise when receiving inventory. If inventory has been physically received but not entered into the system, again, the records will not tie to what is counted. To avoid this error, either segregate this inventory so it won't be counted or receive everything into the system before beginning the cycle count. Having these standards alleviates this type of difference and can help ease the reconciliation process.

The counts have been done, now what? It can not be emphasized enough how significant it is to stay on top of the paperwork associated with cycle counting. As the counts are completed and reconciled, errors can be found and corrected. If these corrections are not made in the system and differences are not resolved, accuracy will never be achieved. It is important to note that cycle counting is not just a way to adjust inventory to the correctly stated amounts, but it is also a method to solve problems and maintain an efficient inventory asset. Problems found may be just a simple training issue or may indicate a need to revamp a company's inventory systems. However, misapplied controls and procedures are often the cause of errors. As errors are identified and systematically eliminated, inventory accuracy of 95% or better can be achieved. Additionally, the need for an annual physical inventory could be partially or fully eliminated!

Sound like a lot of work? Just as with any other inventory counting method, cycle counting still involves the process of counting inventory and it takes time to become efficient in this process. However, cycle counting breaks it down to a much smaller scale. Some questions to consider if you are thinking of utilizing cycle counting are: How important is the inventory asset to your company? What problems have you had with inventory control? What was your company's inventory shrink write-off last year? If you answered "very important," "many," and "too much" to the three preceding questions, it may be time to investigate cycle counting.

THE SIGNIFICANCE OF INVENTORY CARRYING COSTS

Do you consider the cost of carrying inventory when making management decisions? Inventory carry costs represent a substantial factor in overall company profitability and performance. As such, the carrying costs need to be considered in almost every inventory purchasing and management decision. The average carrying cost for many distributors often exceeds 30%. For every $100,000 of inventory held, it costs $30,000 per year, or $2,500 per month just to hold it. When this cost is considered in the decision making process, it's easy to see how it has a direct impact on decisions such as:

• Should you purchase an extra six months worth of inventory to take advantage of a supplier's promotional discount?
• If a supplier announces a pending price increase, should you buy more inventory now to avoid the increase?
• Should you offer discounts to customers to sell off slow-moving inventory?
• How much is it costing you to continue to hold obsolete or slow-moving inventory?

Inventory carrying costs include:

• Overhead Costs -

• Ownership Costs -

• Risk Costs -

• Financing Costs -