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Add value through accounts receivable management plan

May 1, 2008 By    

What if you could improve the quality of your customer base, permanently reduce your debt, enjoy larger profits and increase the value of your company without the need for more people or capital?

Carl Hughes
Carl Hughes

This is a possibility for all retail propane distributors by implementing a simple, yet disciplined, accounts receivable management program.

How well a company manages this area of the business can be a characteristic that separates a quality company from a troubled one. For those who are weak, the good news is the above benefits are available to those who choose to implement a plan. The results of a plan are easily measurable, and improvement can come quickly.

Incorporate a good plan

Actually, a quality accounts receivable management plan encompasses three key areas of our businesses. First, begin by selecting only quality customers. Second, be clear about payment expectations with all customers. Finally, hold customers accountable to what they have agreed to do – pay you on time.

While I cannot write your plan, the following list represents the core elements your plan should include:

1. Do the work on the front end and select good customers.

  • Require credit applications from all new customers.
  • Have a clear credit policy that determines what standards a new customer must meet to be approved.
  • Select and train specific roles for credit approvals.
  • Clearly spell out payment expectations for all sales processes.
  • Allow COD as the only alternative to an approved credit application.

2. Monitor receivable balances daily.

  • Cut off past-due accounts.
  • Do not allow any double fills.

3. Collections process

  • Establish a system to monitor balances daily.
  • Initiate increasingly stern past-due letters.
  • Realize that phone calls are more valuable than letters.
  • Train employees on procedures for collection calls.
  • Turn bad debts over to collections immediately – waiting costs money.
  • Allow only senior managers to make exceptions to the policies.

4. Success requires full company commitment, including sales, service and especially senior management.

Results of a successful plan

A key for any successful receivable management plan is the diligence of ongoing daily execution. Consider these three criteria. There are many measurements of success, but I believe that anything short of these standards demonstrates areas for improvement.

  • Current account balances should be 60 to 70 percent of total receivable balances (assuming a disciplined write-down program for bad debts).
  • Current balances plus balances no older than 30 days past due should represent 80 to 90 percent of total receivable balances.
  • Bad debt should not exceed 1 percent of sales.

Arguments against a program

  • “Our customers are having a tough time and need our help.”

Customers expect to pay their bills on time; most states have assistance programs for those in need. Help those customers find those programs. If you are feeling charitable, take your profits and contribute to a local charity of your choice. Your employees will respect you, the community will appreciate your efforts and the company will gain valuable good will. A sloppy and weak approach to collecting what is owed you will do nothing to build similar charitable recognition.

  • “No one in our company wants to make the hard calls to the customer.”

When trained, those employees who implement the plan create significant value to the company and should be rewarded for successful performances.

  • “The customers in our market don’t like this type of stuff.”

All customers expect to pay their bills when they agree to your service; it’s up to the seller – you – to make the expectations clear and to be consistent.

  • “It will run off too many ‘good’ customers.”

While I don’t subscribe to the “firing-some-customers” philosophy, those customers who choose not to pay on time represent bad risk, and – yes – some may take their slow pay and high risk to your competitor.

Can this part of your company truly change? Absolutely! I regularly observe well-thought plans implemented with great success.

I encourage you to assess your situation and to add this topic to your next business-improvement planning meeting.

Carl Hughes is senior vice president of business development for Inergy LP. He can be reached at or 816-842-8181.

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