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Manage your receivables risk with these 5 steps

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Extending credit to clients can help you sell more to existing customers and attract new ones. But if clients don’t pay on time, it can have a harmful effect on your cash flow — the lifeblood of your business. Collection delinquencies make it difficult to forecast cash flow and may also mean that you have to create a bigger cash cushion than you otherwise would in order to deal with slow payments and still meet your obligations.

These five steps can help your business streamline collection of receivables.

1. Create a credit policy. Outline policies for when to extend credit, what credit limits and terms will apply and what to do when an account is aging. Implement a step-by-step process in which clients apply, are awarded terms based on the information they provide and then are able to work toward better terms as their actions prove their credit. Some pointers:

  • Be fair; don’t show favoritism, because it could become public and cause you to lose clients who feel unfairly treated.
  • Consider whether you want to reward early payers, and what those rewards might be.
  • Warn clients what will happen if they pay late.
  • Be sure all customer service employees understand the policies, and stick to them.

Tip: Be sure your credit application asks for all the information you would need to pursue a late-paying client. Your credit application serves not only to determine if your customer is creditworthy, but also to gather information that prepares you for the worst-case scenario of having to chase down a delinquent account.

2. Run credit checks. Credit checks will help you set up payment terms appropriate for each account. Those with less-than-stellar credit may need to pay more up front while a more reliable client is offered an extended payment arrangement. Business credit-checking services are available from Dun & Bradstreet, Experian, Equifax, Credit.net and many others.

Tip: You can receive payment history, industry trend information, credit limit recommendations and more in reports from the credit bureaus; use them to your advantage when screening potential clients.

3. Monitor your receivables aging. Check for clients whose payments routinely lag and consider alternatives to get them to pay more quickly, such as your incentives for early payment and penalties for late payment. Also check for accounts with a history of on-time payments that suddenly begin paying late. This may indicate financial trouble or some other problem. It probably warrants a discussion with the client to find out what the issue is and how it can be resolved.

Tip: Prepare for the possibility of having to take credit away. Make a plan for how you will alert clients and what reason you will provide.

4. Be cautious with large clients. If you grant credit to just a handful of customers that do a lot of business with you, you are at greater risk than if your receivables are more evenly spread across many smaller accounts. If one or more large trading partners goes bankrupt or develops erratic payment habits it can have a big impact on your ability to predict and efficiently manage your cash flow.

Tip: Immediately get in touch with large clients at the first hint of trouble.

5. Use treasury management receivables solutions to speed the receipt of payment. Automated clearinghouse (ACH), incoming wire payments and credit cards can help get receivables deposited into your account more quickly than check payments. If you receive many check payments, lockbox services can reduce the time from check receipt to deposit. Remote deposit capture allows you to scan checks at your location to create a digital file that is sent to the bank over a secure Internet connection.

Tip: California Bank & Trust’s Treasury Gateway® provides secure access to a wide range of treasury management solutions.

 
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The information contained herein may not represent the views and opinions of California Bank & Trust, a division of ZB, N.A. or its affiliates. It is presented for general informational purposes only and does not constitute tax, legal or business advice.
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