Take Control of Your Receivables, Before They Destroy Your Business

Posted on August 1, 2001 by LCT Staff - Also by this author

No one wants to hear it, but things are going to get tougher. Most don’t want to deal with it, and some operators don’t know how to deal with tougher times. It is unreasonable to read about the economic downturn, the layoffs, the cutbacks, and not expect our industry to suffer. It is suffering, and it will suffer further and deeper.

Your company’s accounts receivables need to be in order so that you can guide yourself through these tough times. Here are just a few horror stories of operators that are facing this problem.

A limousine operator has accounts receivables that are eight months past due from a national affiliate network! Or how about a Connecticut company that is averaging $900,000 in annual sales, but has $180,000 in receivables. A New York operator with $560,000 in annual sales has $66,000 in past-due receivables to local limousine operators. Operators across the nation have received bankruptcy notices from dot-com companies.

Our office is starting to get reports of slow pay, no pay and bankruptcies being filed by supplier companies who once served dot-com companies.

Precept Transportation filed bankruptcy and left many operators with no hope of collecting their receivables. A 30-car West Coast operator is owed money by a well-known national network that is six months old.

Our firm was called in to help a Canadian limousine company in a desperate cash-flow situation. The company could not pay its bills or make its fleet payments and was losing credit with the bank. The company had $190,000 in receivables, enough to bring everything current and have a positive bank balance. I am not a doomsayer, but rather the opposite. I am saying get ready, take action and make the best of this situation. In doing so, you will survive, and might even prosper in greater ways. Be proactive. Don’t wait for the accounts receivables problem to bury you.

What You Can Do

Acknowledge that some bad debt and some slow pay is a part of doing business. However, you determine the amount. You set the policies and practices concerning the credit conditions by which customers do business with you. After all, it is your business. A segment of your customers will generally use your money as long as you allow them. Let’s face it – does anyone besides you give your customers interest-free loans?

Establish a credit policy, and put it in writing. Make it public. Teach your team to understand it and how to use it. Enforce it!

Inform your customers of your credit policy in advance, and establish the rules before you do business with them. Continually train your customers on your credit practices. (This is the first step for new account sales.)

Determine the amount of accounts receivables your company can afford. How much can your cash flow handle comfortably and meet all your payable obligations?

Realize the opportunity cost of your accounts receivables. This should cause you to take action. Remind yourself of the interest-free loan you are extending to your customers. For example, a $150,000 monthly average balance in accounts at 10 percent interest costs you $15,000 annually. For the cost of a good accounts receivable clerk, this equates to 1,250 hours per year, or 24 hours per week.

Assign one individual the responsibility of the accounts receivables. Clearly set the goals outlined above as your minimum requirement of that individual. Support this individual with training, feedback and regular monitoring.

Give the individual time to work your accounts receivables properly. Give assistance with extra hours if needed, especially early on in the process.

Demand regular collection reports on all accounts, and take action promptly when any customer gets outside your established limits. Reports should show calls made, individuals talked to, action taken, comments, customer payment date promised and recommendations on the next action.

Remind yourself regularly that if you don’t make improvements in managing your accounts receivables, they will steadily get worse.

Successful Stories

The Canadian company mentioned earlier has since gotten its accounts receivables under control. It established new credit policies and assigned a staff member the collection responsibilities. Also, weekly reporting was established. The cash flow is good, stress is greatly reduced and bills are paid on time.

A New Jersey company faxed me a copy of their accounts receivables aging report. It does $3,000,000 annually in corporate account work, and it has $33,000 total accounts receivables and is making 10 percent profit. However, two years ago it was about to go under.

The Connecticut operator mentioned above converted more than 50 percent of its corporate accounts to credit cards in 30 days. The two partners are paying themselves salaries again.

No operator has to put up with customers not paying. We all have choices. We can get other business accounts. Sometimes less business paid on time is better than more business paid in 120 days. Some business accounts need to be turned away or not taken in the first place.

Limousine operators need to remember that accounts receivables management is not unique to the limousine industry. This is one of business’s oldest problems, and much has been learned to help all businesses deal with the problem.

Control Your Destiny

Whether you are dealing with a limousine operator for farm-out work, a large national corporate account, the local travel agency or limousine affiliates, you don’t have to take it anymore. Further, you can’t afford to ... for more on this topic, check out the August issue of LCT!

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