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Collection: The Challenge To Cash Flow
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By Benjamin Johnson

A successful chief executive bridges the gap between sales and credit. The sales staff focuses on product specification, quality, size, price, packaging and competitor's price. Sales people, whose
income generally depends upon a sale, fear rejection and resist discussing credit terms.

However, a sale without collecting the money is really not a sale and worse, it is a loss because of the time spent in the collection process, the cost of money, and the cost of production.

Credit terms should be a part of the sales package. The terms should be prominent in the sales presentation and be part of the proposal/specification. The easiest and often most practical way of achieving this is to state credit "specifications" right along with product detail.

Train the sales staff in the importance of cash flow. Continuously remind the sales staff that the conversion of a sale to cash is a necessity and attempt to overcome the fear of rejection and no sale.

The sales person should ask the prospect if the credit terms are agreeable. If not, reach a mutually acceptable compromise with the prospect. Once the prospect has done that and agreed to the terms they are in effect and in reality his terms and ultimately become the basis for the sales contract. Then the collection department can proceed and at that point, the customer no longer has a defense that the terms were not acceptable or not as anticipated.

Down the road when the payment terms have not been met, the sales department often requests the collection department or credit department to back off because of a big order expected to be submitted within a short time. This provides a free loan for the customer and unfortunately invites abuse.

Terms of 30 days then become terms for a longer period and the buyer may defer payments on the new order. This erodes your bottom line because of the cost of money and the need to monitor the account to reduce any losses.

Educate the sales force to be aware of the importance of cash flow and the advantage of discussing credit terms. Emphasize that credit terms are not merely an afterthought in the sales process but a significant part of the transaction.

Credit management must be a high-level company priority. The business executive must realize that as payable systems become more and more sophisticated, credit departments, in order to stay in step, must use equally sophisticated means to accelerate collections. In effect, sales and credit personnel must work together. The credit department must avoid waiting too long to aggressively pursue collection. And sales personnel must agree to innovative techniques, such as incentives and promotions that can both induce sales and increase the customer's desire to remain current it its payments.

Credit, like sales, employs psychology. Good sales is a process whereby the message is frequent and convincing, and correspondingly credit and collection messages start early in the business relationship and should be friendly, but consistent.

Encourage the purchasing and payables departments of your customer's organizations to work together to meet the terms of the sale and pay the bills timely in order to maintain a valued

Granting credit entails a certain amount of risk. A good credit manager will systematically take those risks into account. In some cases, a credit manager will incur greater risk in order to lure
business to the company. But the most difficult is the balancing act between risk and reward.

Offering dating on all invoice does give a customer more time to pay. But make sure that the customer understands that payment will be made on a specific future date, and although the arrangement is unsecured and offers the customer more time to assemble funds and make
plans to pay the invoice, it is imperative that he lives up to the date agreed upon. Steps should be taken to focus on that time and make sure that that date is not a stepping stone to take additional

There is absolutely no harm that can accrue from asking for a deposit, and it is unusual that a sales is lost because of such a request. The terms on an invoice should be preferably 30 days--rather than 45--because a customer will program his payment schedule at the
outside date.

So, for example, if the sale is consummated on the 10th of the month and invoicing is accomplished on the last day of the month, payment is usually not forthcoming until the 30th of the next month, which in effect allows your customer 50 days for payment in this

If the sale were just $100 and the interest rate charged by the bank is 9% the cost of money eroded our profit by $1.23. Therefore, if your company generates a pretax income of 15% in effect the cost of money for a month for these 50 days is reduced to 13.77%. Therefore, if you expect your customer to pay in 50 days, in order to achieve the desired 15% net pretax profit you must adjust your selling price. A good credit manager balances credit risks against increased sales.

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