TREASURY MANAGEMENT

Evaluating and Ma
Receivables Risk
E

Establishing an efficient accounts

receivable process is a critical step for
most businesses. This can necessitate
a major balancing act, says Marybeth
Herkes, Vice President, Lockbox Product
Manager, Associated Bank. You and
your customer likely have completely
different goals. You want to receive
payment as quickly as possible for the
products and services youve delivered.
Your customer, on the other hand,
wants to delay payment to you as long
as possible. You need to come up with
solutions that are acceptable to valuable
customers while minimizing the time you
have to wait for payment and the risk of
nonpayment.
How quickly receivables are paid directly
affects your cash flow, and properly
balanced cash flow is essential for
the ongoing stability of any business.
The faster your company can collect
outstanding receivables, the faster the
cash can be spent to meet payroll and
other expenses, pursue expansion and
investment goals, or enhance company
profits, Herkes says.
Collection delinquencies make it difficult
to forecast cash flow and may also mean
that the business has to create a bigger
cash cushion than it otherwise would in
order to deal with slow payments and
still meet its obligations.

Winter 2012 Business Insider

Evaluating Risks

Run credit checks. Its difficult to believe, but the majority of

companies in the U.S. grant credit without a reference, Herkes says.
In a study by SunGard, 46 percent of companies never score their
entire credit portfolio.* Companies such as Experian (www.experian.
com) and D&B (www.dnb.com) offer credit-checking services.** Once
you run a credit check, you can set up payment terms accordingly,
Herkes adds. For example, a customer with less-than-stellar credit may
need to pay more (or all) up front, where a more reliable customer may
earn an extended payment arrangement.

Anticipate and prevent late payments. Automatically monitor

your receivables aging if possible. Are there customers whose
payments routinely lag? Do you have a goal for new customer
collection periods? Perhaps you could negotiate discounts for early
payment with existing customers that may incent them to pay earlier, or
institute a down payment plan so at least some of the cash comes in early.
With new customers, set your expectations for credit and collection terms
up front to avoid surprises. Act swiftly to collect whenever a payment is
past due.
Monitoring your accounts receivables closely allows you to quickly identify
trends in payment behavior. If a customer has routinely paid on time but
has had several months of late payments, this could be a red flag. Perhaps
the company is in financial trouble or is losing confidence in you as a
supplier. Either way, it merits a phone call with the customer to discuss
the issue and see if there are steps that could prevent future problems.

Spread the risk. If your business is dependent on the payment

timeliness of a few large clients you are at greater risk than if your
receivables are more evenly spread across many smaller ones.
If one large trading partner goes bankrupt or develops erratic payment
habits, your ability to predict and efficiently manage your cash flows
may be significantly affected, Herkes says. Another risk occurs when
you are a supplier to a major corporation or retailer with the clout to
demand payment terms that not only involve deep discounting, but also
significantly extended payment timelines. Be sure to factor these special
payment arrangements into your cash flow planning.

anaging
Managing Orders
Here are some tips for minimizing your receivables conversion cycle
(the time it takes to convert your products and/or services into cash).
Make it easy to buy.
The ordering process should be quick, easy and accurate, Herkes says.
The easier it is for customers to buy from you, the faster they may make that
decision. The cash receivables cycle begins as soon as that order is placed.
Expedite the purchasing/ordering process.
You probably want to guide your customers to your website to order. A
well-organized website streamlines the process for both you and your
customer. When possible, you can provide an immediate payment option
by allowing for credit card payments. You should also consider providing
phone assistance.
For complex or first-time orders, some customers prefer the ease and
reassurance of talking to a company representative when placing an
order, Herkes says. Having someone available to answer questions can
help avoid frustration and increase your order completion rate. In addition,
your customer service representative may be able to suggest companion or
complementary parts or products resulting in incremental sales.

IF YOUR BUSINESS IS DEPENDENT ON THE

PAYMENT TIMELINESS OF A FEW LARGE
CLIENTS YOU ARE AT GREATER RISK THAN
IF YOUR RECEIVABLES ARE MORE EVENLY
SPREAD ACROSS MANY SMALLER ONES.

(or service if manpower is involved)

shortages.

Streamlining Receivables
Invoice promptly.
Strive to invoice within 24 hours of
shipment or other billable event, since
the customer wont begin the payment
process until the invoice is received.

Finally, in order to expedite this portion of the receivables collection cycle,

you may want to discourage orders via traditional mail as much as possible.
When purchasing via mail, the order first has to navigate the customers
internal company mail stream before it even gets into the U.S. Postal Service
system. Once delivered to your company, the order then has to navigate your
internal mail process, increasing the receivables cycle for this order.

Make sure that your invoices are clean

and simple. Extraneous information like
ads and promotions are a distraction.
Invoices typically go directly to the
accounting group and not a purchasing
group, so superfluous information is
not only a waste of the time and money
involved with messaging and design, but
can confuse the main point: the amount
due, Herkes says.

Provide timely product shipments or service completion.

The timely conversion of orders-to-cash can be unintentionally sabotaged
by a businesss internal inefficiencies or lack of precise knowledge of
production metrics, Herkes says. Production problems or insufficient
inventory can prevent you from shipping goods to your customers ready
to pay you upon delivery. Define and measure important targets
(inventory levels, inventory turns, production maintenance schedules, etc.)
within your firm to allow you to anticipate and prevent critical product

Minimize the accounts receivable

collection period.
To speed the receipt of payment, make
bill payment as easy for the customer as
possible. Following are some treasury
management products and services that
may be helpful:
Continued on page 6 >

AssociatedBank.com

A Q U I C K C H E C K O N R E C E I VA B L E S R I S K
Heres a simple way to calculate the percentage of your total accounts receivable
that each client represents.
Total your accounts receivable and then break it down by individual account.
Divide each accounts outstanding amount by total accounts receivable. The
larger the number, the bigger your risk if the client becomes slow to pay.

Electronic payments and deposit.

Reducing the number of paper (check)
transactions can help speed the payment
and deposit into your account. By using
electronic solutions such as automated
clearinghouse (ACH), wire payments and
credit cards, the time between delivery
of the product or service and payment
is minimized.
Lockbox services. For those businesses
that receive a large number of check
payments or large dollar check
payments, lockbox services can
streamline the process and reduce the
time from check receipt to deposit.
Checks are sent directly to a special
remittance address owned by the
bank and retrieved multiple times
each day in order to expedite payment
processing. A benefit of a lockbox
service is to minimize mail, processing
and information float while maximizing
funds availability. Additionally, you can
redirect resources that typically apply
cash within your company to other
critical functions.
Remote deposit capture. This is
another method of accelerating paper
check deposits into your business
account. Simply scan checks at your
location to create a digital file that is
sent to the bank over a secure Internet
connection. This process reduces mail
and check float and allows you to
export data directly into your accounts
receivable system. It also saves the time
and cost of employee trips to the bank or
overnight courier fees to make deposits.

Winter 2012 Business Insider

Online information reporting. Banks can provide a myriad of reporting

solutions to fit your needs. Simple report statements, CD-ROMs containing
lockbox images, both data and image transmission files that can be
uploaded into your accounts receivable or ERP systems, and ultimately
online and web-based information delivery services can provide timely
and convenient access to your account information. When it comes to
managing receivables, knowledge is power, Herkes says. Having instant
access to the information you need to make timely business decisions can
mean a world of difference to your cash flow.

Taking the Next Step

No matter how healthy your sales, an inefficient or ineffective accounts
receivable process can hinder your ability to grow. A treasury
management expert can help you evaluate your receivables needs
and suggest cash management solutions to streamline receivables
processes and improve cash flow.
* Source: SunGard press release, SunGard Study Reveals Increased Demand for Trade
Receivables Analytics, March 9, 2011, www.sungard.com.
** Websites not belonging to Associated Banc-Corp are provided for information only.
No endorsement is implied.
Trademarks and registered trademarks are the property of their respective owners.
Equal Opportunity Lender. Associated Bank, N.A., is a Member FDIC and Associated Banc-Corp.