Sales & cash flow enhancement: a profit center waiting to happen.(Selected topic)

Whether yours is a small or large business, you can improve on profitability by rethinking the role of credit and A/R management. Ask how they think of their credit and past due A/R management function and most business people will respond with a negative. One company CEO referred to it as "the ugly stepchild of accounting", others think of it as a cost center, the sales avoidance department, the stressful job balancing sales and losses, and of course as a necessary evil.

The Purpose of Credit

Every business function should have a clearly stated purpose which answers the question, "Why incur the costs associated with the function?" The stated purpose must also support the overall business strategy.

The costs that go with extending credit terms to customers start with the gathering of information on "who" the customer is and "how" they do business. This should be done by the sales people so as to avoid the redundancy of the credit people having to re-contact the customer, thereby driving up the costs for creditor and customer alike. The information gathered is then normally forwarded to the credit people for credit checking, evaluation and approval. If approved, an account is established and invoices and perhaps statements are sent. If a customer fails to pay within terms they must be contacted. The costs that go with these actions would not exist, except for credit being extended--and can be lumped under an "additional administrative costs" heading. Once a credit sale is billed, we create the cost of carrying A/R (the time value of money); and then the bad debt cost should a customer fail to pay.

Why Extend Credit?

If credit customers require that they be given time to ensure that in fact they got what they wanted, and they require time to process the billing, credit terms must be extended or a profitable sale is lost.

If credit customers require time to add value to purchased products/services and to make sales to their own down-line customers; credit terms must be extended or a profitable sale is lost.