Downturn Makes Receivables Management a Focal Point

Entrepreneur’s Notebook

by Eric Shaw

What do you call the people who handle credit and finance responsibilities for your company?

If you call them your back-office people, give them a new name. Call them your cash-flow managers and teach them to think like professional money managers overseeing a portfolio of stocks and bonds.

This will be good for your bottom line, because the health of your company depends on its cash flow. The more professionally your people manage it, the better.

Too many business owners think of their credit and finance operations as back-office functions. This attitude costs them in more ways than one.

Let’s take credit managers as an example. Before professional money managers suggest that you buy a bond, they match the credit rating of the issuing company against your own risk tolerance, so that you can make an intelligent decision on whether to buy it.

Your credit manager should similarly assess the risk of every transaction involving trade credit, and match each one to your company’s risk tolerance.

But it’s not enough to check out the information gathered on a standard credit application or even to take a look at the financial statements of the company seeking credit. To do a professional job, your credit manager should see the applicant’s bank statements for at least the last three months, if only to find out whether the applicant has the cash flow to handle the payments.

In addition, your credit manager should determine where the applicant does its borrowing. Why? Because there is a difference in getting financing from a big commercial bank, as opposed to a second-tier lender or a bottom feeder.

Your credit manager should also follow specific, conservative procedures in granting credit to first-time customers. For example, assume that a new customer sends in a big order for $100,000 in goods and wants 30-day terms. Thinking like a bond trader, your credit manager gives the risk a B minus rating. You want the order, but you worry and ask your credit manager for some options.

A solid, professional credit manager would point out that your cost of goods for this order comes to $60,000, so why not insist that the customer pay that much up front, with the rest to follow in 30 days? If the customer pays on time, for the next order you can take $50,000 up front with the rest payable in 30 days, and over time reward good performance with better and better terms.

Note what you accomplish here: You get the order, but in the first go-round, you risk only your gross profit, and with every new order you risk less and less.

That’s professional cash-flow management.

Receivables crucial

Now let’s look at another example: your receivables, probably one of the biggest assets on your balance sheet. They need professional management, too, just like your stocks and bonds.

Receivables differ from stocks and bonds in important ways. With receivables, you start out knowing you won’t collect every penny owed you in any given year. Worse, your receivables depreciate over time no matter what you do, not only because your chances of collecting on any given item go down the longer it remains outstanding, but also because you’re probably paying interest on a working-capital loan in the meantime.

Thus your overall goal with a portfolio of receivables is to avoid losing money.

To that end, your receivables manager should buy credit insurance, which pays when a customer becomes insolvent or declares bankruptcy or even subjects you to protracted default. You can cover both domestic and foreign sales with credit insurance with three important benefits:

– You know you will collect on covered receivables.

– You can offer better terms to customers covered by credit insurance, thus increasing sales.

– You can probably muscle better terms from your lender for working-capital loans, given the guarantee that you will collect on covered receivables.

That, too, is professional cash-flow management.

Your receivables manager should go one step further, launching a campaign to update the credit information you now have on your customers, which is probably outdated.

Best customers

As a next step, your receivables manager should work with the credit manager to identify your company’s “blue chip” customers those who pay on time and red-flag the ones who don’t. This will allow your salespeople to concentrate on the good customers and limit or even refuse new orders from the others until they bring their accounts current.

The payoff? Better cash flow. If your receivables average $1 million a month and you can speed collections by only five days over the next three months, you will add $167,000 to your cash flow every quarter.

This is vital in uncertain times like these. Every time you extend credit to a business customer, you bet on the financial well being of the customer’s business, just as you do with any company whose stock or bond you buy. It stands to reason that if you bring professional management to your credit and finance operations the same kind of professional management you want for your stocks and bonds you can fatten your bottom line and thus maximize the value of your business enterprise.

Eric Shaw is president of New York Credit, Marina del Rey, a cash-flow management company. He may be reached at

[email protected].