Improve collections get a 'new attitude': credit has become an important element in the business of doing business, yet in this economy many firms are struggling to pay bills, which is, in turn, causing havoc for the receiving firm's budgeting and cash-flow planning. Here's advice for getting paid faster, dealing with delinquent accounts and, if necessary, taking steps to enforce collection.

• Author: Perlmutter, Norman H.
• Position: CASH MANAGEMENT

The long list of ills resulting from the financial meltdown that started in 2007 includes a backlash that many companies are experiencing due to inherent weakness in their credit-to-cash cycle. It is somewhat like what exposed Bernard Madoff's Ponzi scheme: As long as the economy performed within reasonable limits, it worked. But when the floor fell out from under it, all else followed. Here, too, the economy wasn't the primary culprit--it was just the finishing touch.

"Credit" among other things, means "trust." Companies that sell on credit build businesses on a foundation of trust that works because most of their customers buy with the full intent of paying. As long as all is well, flawed credit and collection practices are often neutralized. But declining cash flows caused by poor economic conditions have tilted this "honor system" for many companies by extending the time it takes their customers to pay, thus exposing the Achilles' heel in their credit-to-cash cycle.

Typically, companies with liquidity problems triage payment priorities. They give preference to creditors based on three factors: Need, because their product or service is vital and impractical to obtain elsewhere; relationships, involving other business associations or personal ties; and the attitude of creditors regarding payment terms.

Need and relationships are difficult to create or control. Attitude, on the other hand, is a psychological strategy built into a company's system that manipulates its customers' desire to do the right thing and their fear of the consequences if they don't. It's a sense of urgency infused into the process that usually gets a particular company higher payment priority.

So how do you implant this passion in customers to pay? A well-known collection agency executive says, "Make it very clear from the start that you expect payment according to terms or else, and remind them continually of their obligation and the cost of not fulfilling it."

Doing this requires a credit-to-cash cycle comprising a strong, incentivized and meticulously administered credit policy, seamless automated bookkeeping/billing systems, decisive and intuitive receivables management and a published, steadfastly executed collection enforcement policy.

Credit Policy and Administration

Credit policy is the backbone of the cycle and often fundamental to the success or failure of a business. If too liberal, severe losses can result. If overly restrictive, growth and profit potential can be suffocated. It must strike a balance that encourages sales objectives while...