Receivables: Distribution's forgotten asset

Using credit and collections to drive business.

by Gary Simon, president, NxTrend Small Business Systems

Inventory is often a wholesale distributor’s largest asset and, consequently, capital investment. Because of this, it’s easy to understand why so much best-practice research and so many software automation products are keenly focused on effective inventory management. Unfortunately, distributors often lose the profitability gained through improved inventory utilization by forgetting about another significant asset: accounts receivable (A/R).

It’s a little naive to think that a distributor actually overlooks outstanding invoices and collecting monies owed. However, accounts receivable is too often dismissed as just an accounting function. The credit management process tends to be reactive and typically forgotten in the quest to create up-sell opportunities and drive the top line.

Business automation to improve operational efficiency
Talk to a typical distributor and they’ll tell you that delayed receivables represent almost all of their collections workload. In other words, their A/R employees are spending the majority of time trying to resolve problems to ensure the profitability of current deals, instead of working to support new or additional business. Further, with basic accounting software or a manual process, credit management is essentially a customer du jour strategy, not a comprehensive business strategy.

The right business automation software can help a distributor improve the operational efficiency of its collections process. By centralizing credit operations, specialized software can help eliminate redundancies and simplify the process of contacting customers about past-due payments.

An integrated credit management module minimizes time-consuming manual procedures for distributors by automatically identifying delinquent accounts and assigning them for follow-up by collections personnel. Employees spend less time researching, organizing and prioritizing their tasks and more time working with customers.

A good system also provides a task-specific callback screen pre-populated with pertinent customer information, allowing personnel to manage all collection activities without the time and hassle required to call up data from different program components. Needless to say, such systems also automatically generate dunning letters and other past-due correspondence.

With improved operational efficiency, a distributor can accelerate the delinquency resolution process. This in turn results in improved cash flow and reduces days sales outstanding (DSO).

More than just reducing DSO
Enhanced cash flow provides a better return on the accounts receivable asset. However, limiting improvement to a shorter late-pay cycle still “forgets” how the A/R function can contribute to driving business. Rather, automation should be a catalyst to enable a shift in the credit management mission to give it a more prominent role in sales and building customer relationships. In other words, with automation, the emphasis of credit management should be changed from “getting paid” to “driving business.”

Improved intelligence gathering
For starters, credit management software should provide a much higher level of credit and collections intelligence to distributors. Automation helps provide structure and organization to the entire process. Information previously scattered among several employees can be consolidated into a single source. And, with a designated place to record customer notes in digital format, valuable information won’t be lost every time someone throws a lunch napkin in the garbage or cleans the dry erase board.

Instead of simply identifying delinquent accounts and contacting them for payment, credit management personnel should utilize the information-gathering capabilities of the software to analyze the reason for a delinquency. If the problem is pervasive across accounts, the distributor may need to address an internal operational issue.

If the problem is customer-specific, credit management software should help identify any relevant trends or seasonality patterns. Surveys show that as much as a fourth of a distributor’s A/R is often delinquent, yet less than one percent is ever written off as bad debt. If a good customer pays late, there may be a business issue the distributor can help overcome by manipulating standard credit terms. Resolving problems elevates customer service levels and helps develop customer loyalty.

Stronger customer relationships may not only mean better cash flow, but also increased sales. And, in doing so, the A/R team has become a part of the sales team.

Credit management software can further automate the relationship-building process of thanking customers for large orders or acknowledging their anniversary date of doing business with the company. Other relationship management techniques enabled by specialized business automation software include sending new account start-up correspondence, suggesting tips to customers with a higher-than-normal credit balance to keep them out of arrears, and surveying inactive accounts to determine if there are issues preventing them from doing business with the distributor.

Create up-sell opportunities
Better efficiency through automation gives credit management personnel time to refocus attention on customer relationship issues and more detailed decision analysis. Since current customers generally are the most likely to buy again, and repeat sales are commonly the most profitable, credit management personnel should look at how to use credit flexibility to close more business from existing accounts.

Providing comprehensive customer information (like sales and profit statistics) and a systematic means of assessing customer credit risk, collections management software can help credit management perform more informed credit risk assessments. Based on thorough and ongoing analysis, credit management can identify customers who would be likely candidates for promotions that use special credit terms as a purchasing incentive.

For instance, a distributor can develop “what if” scenarios that analyze the profitability of offering select customers extended financing terms on products from certain manufacturers. Or, credit management might work with the sales team to target specific customers with special financing for aged or atypical inventory that would otherwise be dead out in the warehouse.

The important point is that with better information and the time to spend on customer relationships, credit management can provide sales with additional flexibility to close business. Again, in doing so, the A/R team has become a part of the sales team.

Incremental business tool
Effective asset management is absolutely crucial for a distributor’s bottom-line health. When looking for business automation software, the focus is rightly on how proficiently a new system can manage inventory. But a progressive distributor should not forget how well a new solution can also manage other assets like accounts receivable.

Credit management may not be a cornucopia of newfound sales, but it can be an incremental tool to help drive business. Credit management personnel should spend time building customer relationships or analyzing data to develop aggressive business building programs, not sending faxes or e-mailing reminder notices.

Business automation software can bring structure and organization to a distributor’s credit management function. Using a solution targeted specifically for credit management applications can help reduce the cost of back-end functions such as sending past-due notices and collection letters, and free personnel to concentrate on front-end activities like working with customers to solve business issues. Further, the distributor will be in a much better position to start using credit and collections to drive business.