Wednesday, January 27, 2010

Credit & Collections - Receivable Incentives

With the economy still experiencing significant uncertainty credit management is very much in the forefront of the finance team's hot list and an owner's mind share. The challenge is to collect as closely as possible to a company's credit terms while still preserving the sales relationship. Preserving the sales relationship now is essential; when the economy recovers customers will have more choices and your company may never find its "recovery" when your competitors have.

In these challenging times more than ever the sales and credit teams must be aligned in both incentives and the company's standard operating procedures if your company is to prosper or even survive. The difficulty is to properly incentivize the credit department to preserve the sales relationship while the sales team "owns" the completed sale; the collections process.

One key component of your company's policy and practices is to apply the old adage "A sale is a sale [only] when the money is in the bank". The old adage must be strictly adhered to otherwise your company is just giving away its products or services.

Recent events within the economy and numerous financial institutions have certainly demonstrated to many of us that it is impossible for a company to "sell" its way out of bad debt. Further slow paying customers may also doom a company financially if the lending institution is closely monitoring receivables. When a company violates its borrowing base convents the bank will have reason to increase fees, increase interest rates or end the banking relationship with all its consequences. Banks will quickly discount receivables that have been used as collateral which are past due creating conditions for a borrowing company to violate its banking convents with the potential for disaster.

There are key ways to preserve both the credit and the sales relationship with customers and even within your company's own ranks. If both the sales and credit teams are tightly aligned together in mutual understanding, company policy and backed up with financial incentives then many credit issues will self resolve; thus, preserving key relationships and your company.

Do you believe that a company can sell its way out of bad debt?