Beware of - The Herd

After a three year hiatus, this year’s credit conference was once again in sunny Las Vegas, Nevada. I always enjoy these credit/collections type conferences as the presenters and attendees have a lot to share. For some it is intense research in the field of finance that is shared during their one hour time slot. For others, it is the less than scientific grasp of the economic system that is poured out along side a tonic and gin. Regardless of the information, I always come away from these events with a deeper appreciation for our economic system and basic human nature.

This year’s conference was filled with many exuberant speakers (and guests). Although it appeared that attendance was seriously down from previous years, most sessions were well attended. The underlying theme of the conference, as with all conferences, is to navigate the sea of information toward finding a way to getting one’s accounts paid. After all, the life blood of any organization rests in its ability to be compensated for the goods and services which it provides its customers.

For any organization, non-profit or for profit alike, is the basic need of liquidity – cash. Without cash, the greatest product in the world will never leave the drafting table. However, it continues to bemuse me how little commitment some organizations pay to their ‘fluid-of-life’. Take for instance, Christine, a credit manager for a large national professional services organization. Christine sports a business degree from a small local college and a few years work experience as an accounting clerk. However, four years ago she landed her current position as a credit manager. She talks about her diet of BI reports and meetings, yet her receivables continue to age. Christine shared with her business specialty unit her firm’s frustration with their current cash flow predicament. However, not surprising that many in the room chimed in with their similar frustrations, at one point, a peer shared his experience at a recent conference where he attended a session ‘What others are doing in collections?’ Without missing a beat, that session was now re-enacted … here.

Here I was in Las Vegas listening to a session that occurred a few months earlier, as one attendee said, almost verbatim. What I found most interesting about this dialogue was that everyone was sharing their ‘efforts’ in getting their bills paid, but no one was sharing if these ‘tactics’ were effective, much less if their organizations had a similar receivable portfolio. It was almost as if a major firm is doing ‘it’, ‘it’ must the right thing to do.

Later that evening, I had the opportunity of dining with academics in the field of finance and credit. What became very apparent to me was that many attendees to these educational sessions only pick up tidbits of the core knowledge they need to be successful. What many firms are failing to realize is that the customer, who holds the checkbook, controls THEIR cash flow. So the big dilemma is what must YOU do to get YOUR bills paid – on time.

Most organizations have a standard diet of customer intake which includes a credit application, a credit check and some type of order. The credit application and credit verification, when completed and processed, is simply a means of heightening the probability in your favor that your bills will get paid. There is no guarantee at this point, and your terms are simply your SUGGESTED terms. The customer will do what the customer CAN do. Once the product or service transaction is complete, then the process of collecting on the invoices becomes paramount.

Once the bill/invoice is out the door, firms don’t believe they have options. For Christine’s firm, the daily dose of BI deposited in everyone’s email is ‘believed’ to generate payment. For a small portion of her portfolio, statements and dunning letters fill plastic bins awaiting postage. This unscientific ‘spray & pray’ approach yields its expected results. It is no wonder that her receivable portfolio has accounts that have aged beyond two years.

Amidst the conversations, Mary-Ann shared her tactics for getting her accounts paid. Her firm, with their 30 days net due, is currently running at 45-52 days past invoice date. Her take on the economy, ‘If my customers are not getting paid on time, how can I expect to?’. Mary-Ann, instead of filling the postal system with printed correspondence, has chosen to reach out to her clients to understand their pains and provide options that ultimately have her bills getting paid. Mary-Ann’s approach has kept her organization alive while several of their competitors have either perished or already on the slippery downward slope.

Organizations have the essence to their survival, cash, tied up in receivables and so many undertake a careless stance in getting their bills paid. Vincent Ryan in his article Lien on Me, looks at how organizations are exploring many different approaches to keep their blood flowing. Ryan discusses how many finance chiefs are finding receivables-based financing a stable source of fast funds. Although the funds are fast, it is no panacea, reporting requirements are strict and there are hefty costs. Guy Guinn, a partner at Squire Sanders Dempsey says “The lender has an iron grip on the company’s cash flows”. However, Ryan reports that many companies welcome the discipline that an asset-based loan brings to receivable management and collections. Although factoring is the most expensive and stringent approach of turning receivables into cash, Ryan suggests auctioning off receivables in an electronic market as a means of turning receivables into cash without relinquishing total control.

I believe that firms have many options available to them when managing their receivables, all of which come down to how much, and the timeliness, of the cash they need and how much they are willing to invest in their most valuable asset. If their modus operandi is herd mentality, then continue to ‘do what others are doing’ and the herd will eventually fall from the cliff. Alternatively, get in touch with your clients (Mary-Ann). Seek to understand their pains and suggest options that are mutually beneficial. And when all else fails; remember there are STILL options!