Your sales team closes a custom order for a new customer. Then, the production crew works diligently to meet the order’s two-week deadline. The final product meets the customer’s specs and ships on time. But what is missing?

Everyone was so preoccupied with completing the sale that no one bothered to check the customer’s credit or collect a down payment. What’s more, a billing clerk had to chase down the sales rep and plant manager to get all the necessary information to accurately complete the invoice which was not mailed until a month after delivery. Now, everyone’s attention has returned to making the next sale or batch of product, leaving no one to follow up on payment.

If this sounds familiar, you are not alone. Scenarios like this play out in factories from coast to coast, resulting in expensive costs in the long run.

When cash flow does not keep pace with work flow, manufacturers need to take a hard look at their billing practices to ensure no jobs fall through the cracks. Here are six ways to strengthen your collection process:

1. Make Collections Everyone’s Job
   Poor collections are often blamed on office personnel; however, almost every employee has a role in the company getting paid. Salespeople are your front line; they must obtain accurate billing information from customers (phone numbers, email addresses and names of payables personnel), as well as request approval to perform credit checks. They also need to negotiate contract terms (such as early-bird discounts, late payment penalties and down payments on custom orders) that will help get money in the door faster. The owner or CFO should approve all new customers and terms before the accounting department sets them up in the system. In addition, factory workers need to code jobs properly and notify the billing department when orders ship. Also, office personnel must promptly submit invoices and follow up on unpaid accounts. Make sure your workers understand their roles in realizing revenue. And give them adequate training and tools to get the job done efficiently.
2. Streamline the Billing Process
   You cannot collect what you do not bill. Set up formal procedures that trigger the creation of an invoice as soon as the delivery truck pulls away from your dock. Electronic billing systems allow companies to send real-time invoices via e-mail or text. Most e-billing systems also enable online payment and purchase orders, as well as automatic re-orders, if applicable.
3. Assign Dedicated Collection Personnel
   Dedicated representatives should be assigned to handle each customer’s billing issues. This allows your office staff to develop a rapport with customers. They should monitor all news accounts closely at first and become more flexible as the relationship develops.
4. Manage Overdue Accounts
   Someone, possibly your controller or finance officer, should be in charge of monitoring accounts receivable aging. Each week, he or she should report to the owners about the percentage of receivables in the 0-30 days category, 31-60 days category and beyond. Doing so allows you to detect and reverse negative patterns before they have a business impact. Develop a timeline for acting on overdue accounts. For instance, after 45 days, you might call or send a reminder text to customers who have not responded after the first bill. By pursuing these accounts before too much time has passed, you send the message that the company intends to get paid but is willing to work with the customer to resolve payment-related questions or problems.
5. Provide Performance Incentives
   Too often, incentives are based on revenues, not profits or cash flow. Consider structuring your incentive program based (or at least partially) on collections. For example, offer a bonus to workers if the company has 50% or more of accounts receivable in the 0–30 days category or keeps bad debt write-offs below 5%.
6. Consider Factoring
   It takes time to rein in collections. If your company needs immediate access to cash, factoring can be a short-term solution. Here, your receivables are sold to a third-party collection agency, usually for 60 to 85 cents on the dollar. This may seem expensive, but it can provide instant cash and free up employees for implementing long-term collection improvements.

Sidebar: Tax Breaks for Bad Debts

After repeated unsuccessful attempts at collection, you may eventually realize that a customer is not going to pay. When it is time for a write-off, the Internal Revenue Code (IRC) offers a tax deduction for business bad debts that may soften the blow.

Under IRC Section 166, a business bad debt is a loss from the worthlessness of a debt that was created or acquired in your trade or business, or was closely related to your trade or business when it became partly or totally worthless. Most bad debts involve credit sales to customers for goods or services. However, they can also include:

• Bona fide loans to customers or suppliers that are made for business reasons and have become uncollectible;
• Business-related guarantees of debts that have become worthless; and
• Debts attributable to an insolvent partner.

To qualify for the deduction, you must show that you have taken reasonable steps to collect the debt and there is little likelihood it will be paid. You also must have previously included uncollectible credit sales in your accrual-basis gross income. If you are unsure whether you qualify for this deduction, contact your tax advisor.

For more information on managing your company’s outstanding receivables, contact Ken Tornheim at [email protected], or call him at 312.670.7444. Visit ORBA.com to learn more about our Manufacturing and Distribution Group.