There are certain key performance indicators (KPI’s) that any business can implement to significantly increase its odds of not only surviving but help it to thrive.
Each segment of your business, including your credit department, should have its own sub-set of KPI’s to ensure your cash flow is optimized while managing costs.
Here are the compelling reasons to carefully manage your accounts receivable:
- If one maintains a systematic method of managing accounts between 30-60 days past due, you should see an 85% reduction in accounts aging past 60 days.
- After 60 days, the probability of collecting your account is 80%, at 90+ days, it slides to just 70%
- If allowed to age past 90 to 180 days, the chances of a full recovery are now 54%!
So what steps can you take to maintain control of your receivables?
Know Your Customer - Paretto’s Principle holds true in most companies that 80% of your revenue is generated by 20% of your customers. Segment your customers by assigning codes. For example:
A. Best customers, great margins, pays within terms, few service issues.
B. Bread & butter clients, consistent orders, no price haggling, pays no later than 45 days,
C. Complains about everything, many warranty issues, stretch payables for a long time, takes unauthorized discounts. Customer you wish you hadn't met.
D. Dead. These are customers purchased from you once and you haven’t heard from in a long time.
Follow-Up – If your receivable still remains unpaid by this point, and there’s no diligent follow-up, then you have effectively given your blessing to be paid sometime after 60 days. Talk to the right person at your customer’s office who can sign a check. Get a firm commitment as to a date when the funds will be received. Confirm your understanding of the arrangement while you have your customer on the phone and again via email right after you hang up.
Pull The Trigger – if by 120 days you still have not received payment- it’s time to take further action. This is the point where most customer-service oriented creditors blink as this step can be uncomfortable. If an individual runs out of money – you can still collect from them when they get back to work.
If a company runs out of money – it’s dead.
At this point we recommend a Ten Day Demand letter be sent advising the customer that unless fall payment is received by a specific date, their account will be placed for collection.
To make the decision to take action easier for creditors, the Third-Party Collection industry has developed a Ten Day Demand letter which creditors can use free of charge. It works like this:
· Letter sent to customer on collection agency letterhead giving the debtor ten business days to remit full payment directly to the creditor.
· If the debtor pays the bill within the ten day period, there is no charge to the creditor.
· Should the debtor pay only a portion of the bill or nothing at all, then their account rolls into the regular collection process of the collection agency. Funds paid after this date will be subject to your pre-determined fee agreement.
All creditors, who use this service, like the certainty that they made the right decision at the right time. If the customer fails to remit – then it was the right time to hire a third party.
To learn more about our Ten Day Demand System, CLICK HERE and fill out the form.