Tuesday, July 22, 2008

Want GiGo free Accounts Receivable?

The last few weeks were spent building the foundation of a credit policy. If one were meticulous and honest in working through the steps, you would be close to a policy that now reflects the organization’s affinity for risk and one that would form the basis of a collections policy. Although the organization owns the client receivable and work in progress, certain individuals must accept responsibility to ensure the inventory is maintained according to policy. This final contribution on building a credit policy focuses the client and the inventory custodian; the credit department.

Contrary to what may be said, people show their likes and dislikes by how they spend their money. Essentially, they buy from people they like. If the bond doesn’t exist, a sale, no matter the price, isn’t forthcoming. Ed Poll in, Collecting Your Fee, sums it up very well with: You can judge the quality of a relationship by the way it ends…a client who genuinely respects you and the work you did will pay your bill in a timely manner. For me, that statement says it all, barring extenuating circumstances on the client side. There are two ways to achieve and maintain that respect, in order to facilitate payment by establishing the foundation for a good relationship from the very beginning, the first meeting. Then once the relationship is established, open regular communication is essential for maintaining trust.

It is during the very first meeting that the professional must establish the foundation for the relationship. Here is where information is exchanged, including costs, fees, terms of payments, and terms of engagement which must all be discussed and documented. It is also the time in which the professional must seek information about the prospect. PROSPECT. The person on the other side of the desk is a Prospect until such time as they meet the organization’s criteria of acceptance into “client-hood”. It is for this reason that he professional must obtain a completed credit application during the meeting, as this is the only means by which the organization can assess where the Prospect fits regarding the firm’s affinity for risk. At the end of the meeting, the professional should have explained the nature of the engagement and provide all discussed to the Prospect, either as an engagement letter or proposal; which must be signed and returned. The professional should have a fully completed and signed credit report.

The credit report form provides core insight into the Prospect’s business; their inherent risk. At this point, the firm must quantify the risk and compare it to their affinity for risk. The process by which this is done was discussed earlier in Crystallizing Goals. The part of the organization that is responsible for making this determination is – the credit department. This responsibility must be clearly documented in the credit policy. Depending on the size and complexity of the organization this section may involve a varying degree of detail. By way of example, here are a couple of options that will seed thought:

The credit department establishes credit limits for all prospects and active clients. These limits are based on D&B or TRW ratings, credit references, financial statements, security, or other information obtained directly from the applicants. The credit department must review large client investments on a periodic basis. All limits are subject to revision, based on changing levels of credit worthiness. Only executive management has the authority to override limits established by the credit department. All overrides must be fully documented and the requesting professional is fully responsible for their collection.


Professionals will obtain a completed and signed firm designated credit application from each prospect. This will contain bank reference and three trade references. Through due process, the credit department will determine the prospect’s ability to pay and the level of risk they pose should they become clients. Should the prospect be accepted as a client, a credit limit will be assigned through the use of scoring tools and techniques. Where the professional determines the credit limit is insufficient for the engagement, the prospect must provide 2 years of financial statements or must maintain, on deposit, the equivalent of 1/3 of the expected cost of the engagement. Only executive management can override this policy.

Having a clear delineation of responsibility for the credit department, the professional and the executive officer ensures that the credit policy is adhered to. With the sign off on the entire policy, all people in the organization will act to ensure a consistent approach for dealing with clients. Your AR is a direct reflection of your organization, if it is full of delinquent garbage AR, you put it there through your practices. Only you can stop the build up of garbage AR – build a garbage-free client portfolio!

In closing,

"When you look for excuses not to change...they will be found. It takes courage, determination and fortitude to get off the merry go round"

Organizations are not the victims of their delinquent clients. You and your organization cause your collections problems by not telling your clients from the beginning what you expect from them. Ed Poll

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