end to end accounts receivable process

End-to-End Process for End-to-End Process for Accounts ReceivableAccounts Receivable

Author: Scott A. MacDonaldAuthor: Scott A. MacDonald

Course design:Course design: AlphaMac Resources, Inc.AlphaMac Resources, Inc.

(c) 2010 AlphaMac Resources, Inc. (c) 2010 AlphaMac Resources, Inc. All Rights Reserved All Rights Reserved

316.209.7400316.209.7400 www.alphamac.comwww.alphamac.com

Distributed by:Distributed by:Alliance Training & Consulting, Inc.Alliance Training & Consulting, Inc.

8900 Indian Creek Parkway, Suite 2708900 Indian Creek Parkway, Suite 270Overland Park, KS 66210-1510Overland Park, KS 66210-1510

913.385.5515913.385.5515www.alliancetac.comwww.alliancetac.com

SMA Solar Technologies

Course Instructor: Miles Hutchinson

Objectives of this CourseObjectives of this Course

Apply current accounts receivable management techniquesApply current accounts receivable management techniques

Understand the importance of contract management to the A/R Understand the importance of contract management to the A/R processprocess

Institute best practices for a credit & collections function Institute best practices for a credit & collections function

Learn the importance of training of everyone in the total A/R process Learn the importance of training of everyone in the total A/R process

Protect the company by understanding the risk inherent in your Protect the company by understanding the risk inherent in your customer list. customer list.

Understand why the use of a loss mitigation company is only a Understand why the use of a loss mitigation company is only a matter of “when” not “if”. matter of “when” not “if”.

Streamline your process for maximized efficiency and improved Streamline your process for maximized efficiency and improved cash positioncash position

(c) 2010 AlphaMac Resources, Inc. All (c) 2010 AlphaMac Resources, Inc. All Rights ReservedRights Reserved

A/R LifecycleA/R LifecycleManagement of Cash Flow

Prospective New Client

Legal action for non-payment

(c) 2010 AlphaMac Resources, Inc. all rights reserved.(c) 2010 AlphaMac Resources, Inc. all rights reserved.

Up-to-date Written Policies and Procedures

Outsource non-core competency

Evaluate customer pre and post sale – good intelligence

Reduce risk with credit products or other means

Performance measures and periodic evaluation of economic conditions

Properly staffed and trained

Tracking Tools

Document Policies & Procedures

Measure & Monitor

Post-SalePre-Sale

Analysis and qualification process to reduce credit risk up front.

EVALUATION

Measure internal processes and monitor customer behavior.

M&M

Get control over your cash flow by making your receivables work for you.

PROCEDURES

Cash application, payment history, collections and cash flow, etc

COLLECTION

4 Pillars of Accounts Receivable


Property & Equipment

Cash, Investments,

& Foreign Currency Exposure

Liability Insurance

Inventory

Insured & / or Actively Managed

Uninsured & Not actively Managed

Borrowing &Interco Lending Accounts

Receivable


Business Risks

What do you think?What do you think?

Why is A/R important?Why is A/R important?

Do you believe your organization places importance on Do you believe your organization places importance on A/R?A/R?

Has your organization identified all the risk in A/R?Has your organization identified all the risk in A/R?

Where do you think your organization can do a better job Where do you think your organization can do a better job managing A/R?managing A/R?

What does your organization do well in managing A/R?What does your organization do well in managing A/R?

Does your organization have an “owner” of A/R?Does your organization have an “owner” of A/R?

How well is your A/R process documented?How well is your A/R process documented?


Accounts ReceivableAccounts ReceivableWhy is Accounts Receivable to importantWhy is Accounts Receivable to important

Contract administration and its effect on managing A/RContract administration and its effect on managing A/R

Cash applications process is importantCash applications process is important

Cash management techniquesCash management techniques

When to invoiceWhen to invoice

Where does invoice info come from?Where does invoice info come from?

Methods of presenting invoices for paymentMethods of presenting invoices for payment

Methods of receiving paymentsMethods of receiving payments

Management reporting of agingManagement reporting of aging

Importance of status calls to customersImportance of status calls to customers

How and when to talk to the sales staffHow and when to talk to the sales staff

How to handle customer questions How to handle customer questions

Streamline with automation and help from your bankStreamline with automation and help from your bank


Customer VettingCustomer Vetting

What does your company do?What does your company do?

Who are your customers? Who are your customers?

What are their needs? What are their needs?

What is their financial situation? What is their financial situation?

How have they treated other vendors? How have they treated other vendors?

How have they treated their other payment obligations How have they treated their other payment obligations like the government? like the government?

What is their industry? What is their industry?

Who owns them? Who owns them?

Who is their ultimate owner? Who is their ultimate owner?


Customer Vetting (continued)Customer Vetting (continued)

Are they domestic or foreign? Are they domestic or foreign?

Where are they located? Where are they located?

Who is their law firm? Who is their law firm?

Who is their accounting firm? Who is their accounting firm?

Why do they want to do business with you? Why do they want to do business with you?

Are they a related party? Are they a related party?

Is address of company a mail drop? Is address of company a mail drop?

How do they answer the phone? How do they answer the phone?

Where did the lead come from?Where did the lead come from?

What is a Z Score?What is a Z Score?


Customer MonitoringCustomer Monitoring

Payment history Payment history

Occurrences of NSFs Occurrences of NSFs

Returned invoices or large number of Returned invoices or large number of credit memoscredit memos

Unusual address changes Unusual address changes

Economic conditions of your customersEconomic conditions of your customers

What other monitoring does your company What other monitoring does your company do? do?


When do you call about When do you call about payment?payment?

Best Practice – Status call “high risk” Best Practice – Status call “high risk” customer BEFORE due datecustomer BEFORE due date

You will have to define “high risk”You will have to define “high risk”

Some factors are past payment problems, Some factors are past payment problems, past order problems, significant credit past order problems, significant credit memo history, etc.memo history, etc.

What is your company practice?What is your company practice?


Something You Need to KnowSomething You Need to Know

DSO DSO (Total Receivables/Total Credit Sales) x Number of (Total Receivables/Total Credit Sales) x Number of Days in the measurement period = Day Sales Days in the measurement period = Day Sales OutstandingOutstandingExample of DSO:Example of DSO:

Total Receivables = $5,000,000.00Total Receivables = $5,000,000.00Total Credit Sales = $10,000,000.00Total Credit Sales = $10,000,000.00Number of days in period = 90Number of days in period = 90

(5,000,000.00/10,000,000.00) X 90 = 45 days (DSO)(5,000,000.00/10,000,000.00) X 90 = 45 days (DSO)


One More Thing to KnowOne More Thing to Know

Best Possible DSOBest Possible DSO(Current Receivables/Total Credit Sales) X Number of Days = (Current Receivables/Total Credit Sales) X Number of Days = Best Possible DSOBest Possible DSO

Example of Best Possible DSO:Example of Best Possible DSO:

Current Receivables = $2,500,000.00Current Receivables = $2,500,000.00Total Credit Sales = $10,000,000.00Total Credit Sales = $10,000,000.00Number of days in period = 90Number of days in period = 90(2,500,000.00/10,000,000.00) X 90 = 22.5 days (best possible (2,500,000.00/10,000,000.00) X 90 = 22.5 days (best possible DSO)DSO)

Best Possible DSOBest Possible DSO yields insight into delinquencies since it uses yields insight into delinquencies since it uses only the only the current portioncurrent portion of receivables. As a measurement, the of receivables. As a measurement, the closer the regular DSO is to the Best Possible DSO, the closer the closer the regular DSO is to the Best Possible DSO, the closer the receivables are to the optimal level. It helps to distinguish between receivables are to the optimal level. It helps to distinguish between length of selling terms and delinquency.length of selling terms and delinquency.


Accounts Receivable AgingAccounts Receivable Aging

Listing of A/R accumulated by number of Listing of A/R accumulated by number of days past duedays past due

30, 60, 90, 120 are typical categories30, 60, 90, 120 are typical categories

Should be getting at least monthlyShould be getting at least monthly

(c) 2010 AlphaMac Resources, Inc. all (c) 2010 AlphaMac Resources, Inc. all rights reserved.rights reserved.

Case Study #1Case Study #1It is early December 2005. It is early December 2005. Your company manufactures televisions. You are approached by Circuit City Your company manufactures televisions. You are approached by Circuit City to supply TVs. You estimate that your revenue will grow 30% with this to supply TVs. You estimate that your revenue will grow 30% with this addition. addition. Your sales manager and his staff won’t meet their goals this year unless you Your sales manager and his staff won’t meet their goals this year unless you sign them and your sales manager has already threatened to quit if the deal sign them and your sales manager has already threatened to quit if the deal isn’t OK’d. isn’t OK’d. The net margin is a little below what you normally do, but the deal appears to The net margin is a little below what you normally do, but the deal appears to be profitable if the number of units meets expectations. be profitable if the number of units meets expectations. Circuit City hasn’t given you any trade references yet or any financial Circuit City hasn’t given you any trade references yet or any financial statements. statements. Your sales manager’s uncle knows someone at the bank that knows Your sales manager’s uncle knows someone at the bank that knows someone in the accounting department at Circuit City and says they are a someone in the accounting department at Circuit City and says they are a good credit risk. good credit risk. CC stock went from $9 per share in Sept 2003 to $20 per share in Nov 2005.CC stock went from $9 per share in Sept 2003 to $20 per share in Nov 2005.Is this a good opportunity? Is this a good opportunity? How would you go about setting a credit limit? How would you go about setting a credit limit? What facts are relevant to your decision?What facts are relevant to your decision?


Case Study #2Case Study #2

The year is 2008, is your deal with Circuit The year is 2008, is your deal with Circuit City still good?City still good?

Note: For those that don’t know, Circuit City filed bankruptcy in early Note: For those that don’t know, Circuit City filed bankruptcy in early November 2008. November 2008.


Credit ReportsCredit Reports

Used to measure financial strengthUsed to measure financial strength

Most info is “old history”Most info is “old history”

Some credit companies have predictive Some credit companies have predictive methods (Z Scores)methods (Z Scores)

Can change dailyCan change daily

Your customer monitoring system should Your customer monitoring system should be on-line and alert major changesbe on-line and alert major changes


Credit InsuranceCredit Insurance

Has your company every considered Has your company every considered Credit Insurance?Credit Insurance?

Reduces risk of loss to near zeroReduces risk of loss to near zero

Lets you know which of your customers is Lets you know which of your customers is NOT credit worthyNOT credit worthy

Includes on-going credit monitoringIncludes on-going credit monitoring

Sets credit limit Sets credit limit

May help expand your businessMay help expand your business(c) 2010 AlphaMac Resources, Inc. all (c) 2010 AlphaMac Resources, Inc. all

rights reserved.rights reserved.

Other Risk Mitigation StrategiesOther Risk Mitigation Strategies

Letter of CreditLetter of Credit

Personal guaranteesPersonal guarantees

LiensLiens

UCC – talk to your legal team for adviseUCC – talk to your legal team for advise

Right to take product back – in contractRight to take product back – in contract

Recouping costs of collectionRecouping costs of collection

Credit applicationCredit application

Do you have any other strategies?Do you have any other strategies?


Use of FactoringUse of Factoring

Do you know what factoring is?Do you know what factoring is?

Factoring = selling A/R to third party at Factoring = selling A/R to third party at discount.discount.

Used when cash flow is needed.Used when cash flow is needed.

Best application when high margin items.Best application when high margin items.

All factoring companies are not created All factoring companies are not created equally.equally.


Following Terms of the ContractFollowing Terms of the Contract

Are you following contract terms? Are you following contract terms?

Is the customer following the terms of the agreement? Is the customer following the terms of the agreement?

Do you have a central repository for contracts? Do you have a central repository for contracts?

How are contract terms communicated to Accounts How are contract terms communicated to Accounts Receivable staffReceivable staff

Who monitors changes? Who monitors changes?

Are your contracts backed up off site? Are your contracts backed up off site?

When do you stop delivering? Get legal advise!!!When do you stop delivering? Get legal advise!!!


Cash ApplicationsCash Applications

How current are your cash applications? How current are your cash applications?

The dirty little secret of “cash suspense”. The dirty little secret of “cash suspense”.

By the way, who owns your cash float? By the way, who owns your cash float?

Does your invoicing process facilitate easy Does your invoicing process facilitate easy payment?payment?


Best Practices A/R FunctionBest Practices A/R FunctionPolicies and Procedures must be in Writing AND up-to-datePolicies and Procedures must be in Writing AND up-to-dateQualify/Vetting before sale – potential use of credit insuranceQualify/Vetting before sale – potential use of credit insuranceAccount opening proceduresAccount opening proceduresMonitor customers after saleMonitor customers after saleFollow contract termsFollow contract termsCash application MUST be currentCash application MUST be currentDetermine when factoring might be advantageousDetermine when factoring might be advantageousEvaluating industry conditions periodicallyEvaluating industry conditions periodicallyClassify customers – Slow Pay, Won’t Pay, Can’t PayClassify customers – Slow Pay, Won’t Pay, Can’t PayProper staffing, compensation and training in all functionsProper staffing, compensation and training in all functionsDetermine “when” not “if” you will use an outside collections expertDetermine “when” not “if” you will use an outside collections expertFeedback to sales forceFeedback to sales forceProper systems to track A/R and collections activitiesProper systems to track A/R and collections activitiesProcess for legal actionProcess for legal actionOutsource non-core competenciesOutsource non-core competenciesBenchmark and Performance MeasuresBenchmark and Performance MeasuresInternal controls and confidential incident reporting by employees, customers and Internal controls and confidential incident reporting by employees, customers and vendors.vendors.


What to do when you aren’t What to do when you aren’t getting paid.getting paid.

So you have done everything rightSo you have done everything right

Credit reportsCredit reports

MonitoringMonitoring

Measuring Measuring

And your customer still isn’t payingAnd your customer still isn’t paying

What are your collection options?What are your collection options?


In-House CollectionsIn-House Collections

Who does in-house collections? Are they really collectors? Who does in-house collections? Are they really collectors?

How are they trained? How are they trained?

What is their “real” job? What is their “real” job?

Do they use a script? Do they use a script?

Do they have an up-to-date contact list? Do they have an up-to-date contact list?

How is the salesperson involved? How is the salesperson involved?

Are his/her sales commissions effected by slow pays or charge-Are his/her sales commissions effected by slow pays or charge-offs? offs?

Are collections your core competency? Are collections your core competency?

Classify your customers – Slow Pay, Won’t Pay, Can’t PayClassify your customers – Slow Pay, Won’t Pay, Can’t Pay

Give your collectors access to credit reportsGive your collectors access to credit reports


In-House Collections In-House Collections (continued)(continued)

How much does it cost to collect in-house? How much does it cost to collect in-house?

What system do you use to track collections? What system do you use to track collections?

Collectors are a different breed of cat Collectors are a different breed of cat

How do you motivate collectors? How do you motivate collectors?

What are the legal ramifications of a personal accounts What are the legal ramifications of a personal accounts vs. commercial accounts? vs. commercial accounts?

Does legal need to be involved?Does legal need to be involved?

Stopping the Domino EffectStopping the Domino Effect


Courtesy Creditors Resource GroupCourtesy Creditors Resource Group

10 Top Reasons Businesses Fail 10 Top Reasons Businesses Fail with Internal Collection Initiativeswith Internal Collection InitiativesNo formal policyNo formal policyLack of collection knowledgeLack of collection knowledgeStaff lacks experienceStaff lacks experienceLack of manpowerLack of manpowerNo tracking softwareNo tracking softwareWrong methodologyWrong methodologyLack of credit reportingLack of credit reportingWaiting too long to outsource problemsWaiting too long to outsource problemsLack of an outsourcing partnerLack of an outsourcing partnerWhen they don’t know WHAT to do, they do NOTHING!When they don’t know WHAT to do, they do NOTHING!

Group ExerciseGroup Exercise

2 groups2 groups

Group A – Come up with reason to use an Group A – Come up with reason to use an outside collection agencyoutside collection agency

Group B – Come up with reason NOT to Group B – Come up with reason NOT to use an outside collection agencyuse an outside collection agency

Each group list top 5 most important Each group list top 5 most important reasons.reasons.


When to Use Outside CollectorsWhen to Use Outside Collectors

It should be “when” not “if”It should be “when” not “if”Should be based on chronological triggerShould be based on chronological triggerFind an agency – 12k to chose from - Find an agency – 12k to chose from - Know the important factors in choosing an agencyKnow the important factors in choosing an agency– People, systems, remit frequency, professionalism, managementPeople, systems, remit frequency, professionalism, management

If you don’t know where to start in selecting an agency, talk to If you don’t know where to start in selecting an agency, talk to AlphaMac Resources, Inc. They have already done all the leg work.AlphaMac Resources, Inc. They have already done all the leg work.Remember, every month your chances of collection drop 8% to Remember, every month your chances of collection drop 8% to 10%, plus cost of funds.10%, plus cost of funds.All agencies work on contingency of some sort, average is 25% All agencies work on contingency of some sort, average is 25% across the industry.across the industry.Biggest reason companies don’t use Outside Collectors – don’t want Biggest reason companies don’t use Outside Collectors – don’t want to make “good” customer mad.to make “good” customer mad.Do you do your own brain surgery? Of course not, you call in the Do you do your own brain surgery? Of course not, you call in the professionals.professionals.


What to look at in a Collection What to look at in a Collection AgencyAgency

You have to know your internal costs to make an informed decision? You have to know your internal costs to make an informed decision?

Systems matter Systems matter

Size is relativeSize is relative

Do they do credit reportingDo they do credit reporting

Experience matters Experience matters

What about international accounts? What about international accounts?

When do you take legal action? When do you take legal action?

Bringing other solutions to your customersBringing other solutions to your customers


(c) 2010 AlphaMac Resources, Inc. all (c) 2010 AlphaMac Resources, Inc. all rights reserved.rights reserved.

"Witch" to help collection agencyJan 08, 2009TBT Staff in cooperation with BNS http://www.baltictimes.com/news/articles/22087/VILNIUS - The Skolu Isieskojimo Biuras debt collection agency has begun working with Vilija Lobaciuviene, Lithuania's so-called chief "witch," to help out with debt recovery from companies that won't pay up. "We will first look into problems with serious debtors, who repeatedly and consciously fail to up even when not faced with financial difficulties", the collection agency said in a statement.Lobaciuviene plans to apply various non-traditional methods in her practice, including corrections to an entrepreneur's biofield, meditation and suggestive measures.The bureau announced having signed an agreement with Lobaciuviene, head of the Folk Medicine Center.The collection agency assures that none of the measures to be applied could have a negative effect on an individuals psychological well-being.

Financial Impact of Past Due Financial Impact of Past Due AccountsAccounts

Liquidity Liquidity

Debt Covenants and the Bank Debt Covenants and the Bank

Factoring Factoring

Matching of Cash inflow and outflow Matching of Cash inflow and outflow

Do you have a policy for your allowance Do you have a policy for your allowance for doubtful accounts?for doubtful accounts?



Your company is attempting to adopted a Best Practices Your company is attempting to adopted a Best Practices model for their Credit & Collections Function. model for their Credit & Collections Function. As part of this model, you are constantly monitoring the As part of this model, you are constantly monitoring the payment practices of your customers. payment practices of your customers. On March 31, your Credit Manager comes to your office On March 31, your Credit Manager comes to your office and shows you an analysis of your “best” customer, and shows you an analysis of your “best” customer, indicating that their DSO has increased by 15 days since indicating that their DSO has increased by 15 days since the end of the year. the end of the year. The Credit Manager asks you what you want to do. The Credit Manager asks you what you want to do. How do you respond?How do you respond?



Would your response from Case Study #3 Would your response from Case Study #3 differ if it was your “worst” customer?differ if it was your “worst” customer?


ConclusionConclusion

A/R is like any other Asset – Must be managed A/R is like any other Asset – Must be managed professionallyprofessionally

If you don’t have expertise in-house then hire an If you don’t have expertise in-house then hire an expert expert

A/R is the live blood of any company; treat it that A/R is the live blood of any company; treat it that way!way!

Topics discussed in the presentation have legal, Topics discussed in the presentation have legal, tax and other implications to your business. You tax and other implications to your business. You should discuss any actions you take with your should discuss any actions you take with your legal, tax and financial advisors.legal, tax and financial advisors.


FeedbackFeedback

Did we meet your expectations?Did we meet your expectations?

What other topics would be helpful?What other topics would be helpful?

Would you recommend this class to Would you recommend this class to others?others?


Additional ResourcesAdditional ResourcesGraham-Leach-BlileyGraham-Leach-Bliley

HIPPAHIPPA

Foreign Corrupt Practices Act Foreign Corrupt Practices Act

Truth in Lending ActTruth in Lending Act

Fair Credit Reporting ActFair Credit Reporting Act

Equal Credit Opportunity ActEqual Credit Opportunity Act

Fair Credit Billing ActFair Credit Billing Act

Right to Financial Privacy ActRight to Financial Privacy Act

Consumer Leasing ActConsumer Leasing Act

Fair Debt Collection Practices ActFair Debt Collection Practices Act

Unsolicited Credit Card ActUnsolicited Credit Card Act

The Bankruptcy Reform Act of 1978The Bankruptcy Reform Act of 1978

Federal Consumer Credit Protection Act Federal Consumer Credit Protection Act

Lots more – Talk to an attorneyLots more – Talk to an attorney

AlphaMac Resources, Inc. 316.209.7400 – Outsourced Credit Operations, Credit Reports, Credit AlphaMac Resources, Inc. 316.209.7400 – Outsourced Credit Operations, Credit Reports, Credit Insurance, Collection Agency Referral, Factor Referrals, and Development of End-to-End Insurance, Collection Agency Referral, Factor Referrals, and Development of End-to-End Policies and ProceduresPolicies and Procedures..


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end to end accounts receivable process

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