Improving collections is a guaranteed quick way to improve your bottom line.

The logic is simply: The more cash in the door means less interest expense (or more interest revenue).

The current issue of BCFM’s bimonthly magazine, The Financial Manager, is filled with several great articles on improving credit and collections practices that could help all of us with improving our results for 2008.

Since some of you may not be members of BCFM or its Broadcast Cable Credit Association (BCCA) subsidiary, I would like to use my next few columns to pass along some of the insights shared by our members and other industry experts.

In addition to serving as a reminder of the great ROI that our members receive on their annual dues investment, I hope this information gets any non-members thinking about how we can help your company achieve its potential.

First up, here are some tips from an article that was written by Abe Walking Bear Sanchez, a speaker, consultant and trainer who specializes in cash flow and sales enhancement. In addition to writing for The Financial Manager, Sanchez has shared his advice in our Distance Learning Seminars.

“Don’t give up on past-due customers,” he says. “The vast majority of them is accountable and will pay—if you follow a simple recipe.”

It costs eight to 14 times as much to find and sell new customers as it does to keep and sell to existing ones, according to Sanchez.

However, he finds that there still exists an out-of-date and misguided belief that past-due credit customers are bad, and that it’s wise to block them from making any new purchases.

This “risk management” view of credit and accounts receivable management results in credit managers spending much of their time analyzing whether non-paying clients should be put on the “credit hold/do not sell” list.

As a result, salespeople are apt to cross the street in order to avoid a face-to-face encounter with a past due customer.  Instead, Sanchez suggests that the only credit customers that should be placed on a “credit hold” list are the ones that, for whatever reason, can’t pay or who are trying to avoid paying.

In his experience, the vast majority of past-due customers is accountable and will pay. Very often, there are good reasons why most past due accounts don’t pay within terms.

Past due customers not only represent potential lost sales, they also represent an opportunity to elevate customer service levels. By listening to our past-due customers, we can learn how to improve our business processes.

The Laggards’ Mindset

In Sanchez’s experience, there are different reasons that customers become past due and we need to treat them accordingly.

Some become past due because they’re disorganized or inattentive to their accounts payable function. Others may be using accounts payable as a form of cash-management, where vendors/suppliers serve as a form of short-term financing.

The smallest percentage of past due customers are those who are trying to avoid payment altogether. In Sanchez’s opinion, the best thing to do with these “avoiders” is to write them off and assign them to an enforcer, either a collection agent or an attorney.

There will also be a small percentage of customers who can’t pay and have no idea when they will be able to pay. These are prime candidates for a bankruptcy filing. I will pass along ideas for addressing this category of past due customers in my next Front Office column.

Many more past due customers don’t pay because they’re facing a difficulty. They include customers who don’t have the ability to pay when the money’s due, but can and will pay in the near future.

As Sanchez reminds us, the reason for contacting past due customers is not to collect; that’s what the enforcers do. Rather, it’s to complete the sale. The goal is to keep credit customers current and buying, and to identify and control the small percent that represents a potential for loss.

Steps for Success

With enhancing sales and increasing cash flow as the true objective for credit and collections, Sanchez identifies four major steps to follow, which cover making the sale, completing the sale and improving past due accounts receivable (A/R) management practices.

1. Contact the Decision Maker. In sales the decision maker is the person who can say “yes.” In past due A/R management, it’s the person who can tell you when you’ll be paid, and just as importantly, why you weren’t paid when the monies were due.

The best opening in a completion of the sale call is: “Our records show invoice number ___, dated __day of __ for ___ dollars is still open. Can you please help me with this matter?”

Then, Sanchez advises, “shut up and listen.” This is when you will discover ways to improve your relationship with the customer and whether or not this experience can help us to improve our processes. 

2. Determine the Type of situation. In sales, we ask questions about the customer’s needs or desire so that we know their “hot button.” In completion of the sale, we ask questions about why the customer hasn’t paid so that we can determine the account type (laggard AP process, short term cash problem, bankruptcy, etc). 

3. Push the Hot Button. In sales, we want to point out how our product/service meets or exceeds the customer’s expectation, which represents the customer’s hot button. In completion of the sale, we want to resolve why the account is delinquent. For example:

• If a customer is disorganized or typically slow to pay, we become a friendly squeaky wheel.

• If something’s gone wrong, we fix it.

• If a customer has a short-term cash flow problem, we work with and encourage him or her. And the company continues buying from us.

• If a customer has no idea when he or she will be able to pay, we need to cut off further credit sales and move at once to improve our position on the account (liens, notes, personal guarantees, returns, barters).

• If a customer is uncooperative, lies and breaks payment or other arrangements, we need to cut off further credit sales and then get the account out to a collector.

4. Close and Follow Up. Sanchez notes that in both sales and completion of the sale, we want to repeat the understanding and then calendar the account for follow up.

He provides the example of a credit manager he once met whose office was a bulletin board covered with pictures of her customers’ children.

“I love my job,” she told him. “I get to come to work and call my friends all around the country on my employer’s long distance service.” All those friends, whose kids’ pictures decorated the walls of her office, worked in A/P departments at her employer’s customers.

This example reminds us that calling past due customers can be enjoyable, if we choose to make it so.

Early and cheerful contact, combined with fixing things that go wrong and the early identification of potential losses, are the steps toward fewer losses, better cash flow and more repeat sales.

Such measures will also raise our levels of customer service and customer retention.

Stay tuned for more recommendations on what to do when a past-due account goes into bankruptcy and related ideas for improving revenue collections.

Mary Collins is the president and CEO of the Broadcast Cable Financial Management Association, a professional society for addressing the diverse needs of financial and business professionals in the broadcast, cable, and electronic media industries. Her column appears here every other Friday.