What is the overall goal of credit and collections? Simply put, it’s to regularly turn invoices into cash within the payment terms; but it’s not that simple. Most companies have to reach smaller incremental goals in order to reach their overall goal of reducing accounts receivable and increasing cash flow. Without working towards and celebrating the smaller goals, companies can struggle to get anywhere near their overall credit and collection goals. Below we list the smaller, incremental credit and collections goals that you must first reach in order to set yourself up for success in your overall goal.
The purpose of this process is to maximize your sales opportunities while also ensuring that only good credit risks are being taken. If sales are being made to bad customers it doesn’t matter how many customers you have, you won’t collect any cash and you won’t improve you accounts receivable. Make sure your sales team and the credit managers are on the same team and understand this purpose; only then can you being to develop a lasting and effective credit/sales approval process. One way to do this is by making sure the sales team is well versed in your organizations credit policy and collection process while the credit managers and employees should be equally well versed in sales policies and procedures.
Before a customer can pay your invoice two things must happen.
- They must receive the invoice.
- The invoice must be approved for payment.
Sending invoices ASAP after a sale is critical to a customer paying you on time, since they may need to take care of several steps on their end before they can pay it. One way to help move the process along is by sending the invoice to the customer in a format or layout they prefer or require for processing. This can be time consuming and tedious when you have multiple customers who require different invoice templates, but a credit and collections management system can help you save templates to certain accounts so you can quickly generate and send invoices that match their needs.
Managing accounts receivable is no easy task and it has a goal all its own- to complete past sales and stimulate repeat sales. Returning customers are your most inexpensive and probably best sources of income and the way you manage accounts receivable will play into their decision to work with you in the future or leave you for a competitor. There is a lot that goes into accounts receivable management including customer communications, payment reminders, invoice follow-up, dispute resolution, customer service, and much more. It is this small goal that tends to cause the biggest problem for companies who need to improve their credit and collection goals. Read up on accounts receivable best practices here.
Where are you today when it comes to credit and collections performance and where do you want to be tomorrow? Determining your credit and collections goals and then tracking your progress is a crucial part in your strategy to reaching that broader goal so you can identify what you are doing well and identify opportunities for improvement. Some common metrics to measure include:
- Average days sales outstanding (DSO)
- Average days delinquent
- DSO vs. best possible DSO
- Collection Effectiveness Index
- Accounts Receivable Turnover Ratio
Building a world-class credit and collections process and strategy takes time and it can be overwhelming, so don’t focus on the big goal, focus on each of these smaller ones and the larger goal will come as you pull them all together.
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