Many small and midsize businesses (SMB) we consult with are afraid of implementing policies and procedures to better manage their accounts receivable (A/R) because they are scared of losing customers. The thought is that if they enforce the credit terms established during contract negotiations that their buyers will simply find someone else to do the job.

Are you scared of your customers? Is this fear preventing you from achieving A/R best practices? Don’t be afraid of making sure your customers pay you on time. The strength of your A/R processes sets the tone of your ongoing working relationship. If you allow buyers to explore how far they can push their payables and get away with it then what are you teaching your customers? Are you broadcasting that you are not good at managing and collecting your receivables? What else might you not be good at?

Successful SMB understand the impact of making good impressions. They create a professional web presence; develop impressive literature; record phone tree navigations to different departments and more, all in an effort to emulate the buyers’ experience of working with their larger industry counterparts. It’s important for company management to understand that how they operate trade credit is also a reflection on their business. Don’t let a fear of enforcing your credit terms permeate through your entire organization. Best practice trade credit administration policies that are clearly communicated to your staff and to your buyers will strengthen your reputation for running a tight ship.

Extending trade credit is essential to attracting and retaining customers but it comes with the responsibility of managing the costs of credit. For example, selling a 60 day term provides a "sales" benefit on the front-end to win business and separate you from competitors. Selling a 30 day term yet allowing your buyers to slip to 60 days is not a smart use of credit. If you originally negotiated a 30 day term only to find that your buyer is slow paying in as much as 60 days - but otherwise is a good customer - consider the carrot of bringing them current, then extending them 60 day terms, with the understanding that you expect them to honor your terms. This creates a better long term customer relationship verses doing nothing at all because at least you are getting paid. And keeping your customers within the credit terms you provide helps your organization better manage your cash flow.

It is the responsibility of the seller to manage their credit terms and failing to do so creates uncertainty for both the seller (When will payment arrive? Is my buyer doing okay? What’s my risk? How should I collect?) and the buyer (Will they deliver another order? Can I delay another week while I pay another vendor first?). Unchecked, this lack of structure, damages the fabric of the relationship.

It’s best to start your buyer relationship under a structured procedure for trade credit administration rather than trying to re-train them later. If you are moving your organization from lax trade credit policies to structured administration, this requires thoughtful client communication. Are you the best at what you do or the best financing source of free money? Maybe it’s both, but knowing how your clients perceive you is important as you communicate your improvements to your trade credit administration. Position this communication as a positive result of your company’s growth.

While flexibility in credit decisions should always be maintained and based on the best available information at the time, having structured policies and resources in place to help make these decisions is key. Are you ready to implement AR best practices?