5 Ways To Avoid Your Receivables From Becoming your Liability

Written by Govindraj Muthyalu CPA, CIA, CISA

One of our major customers, a consumer electronics distributor who had huge receivables from a well-known retailer, told me “IF I STOP SUPPLIES, THEY WILL STOP PAYMENT, AND START BUYING FROM MY COMPETITOR”. It was a catch 22 situation.  The retailer in question was a reputed company which had many branches across the country.  The distributor had offered 30 days credit to the retailer. Within 15 days after the first order, the retailer had placed another big order. After 30 days when it was time to pay the overdue  invoices relating to the first order, the retailer placed one more order and requested for additional time to pay the overdue invoices.  The distributor was comfortable in extending additional credit since he was getting sizeable orders, and he did not anticipate any issues with the payment from the retailer.  As weeks and months passed by, the supplies to retailer increased at a much faster pace than the increase in the payment from retailer.  Whenever the distributor used to ask the retailer to clear the overdue invoices to get new supplies, the retailer used to clear small part of the overdue invoices and request for additional supplies.  The retailer had excellent business but was poor in paying his suppliers. The retailer used to tell the distributor not to force him to go to other distributors by stopping the supplies. It was a “SOFT EXTORTION”. In about a year, before the distributor could realize, HIS HUGE RECEIVABLES FROM THE RETAILER HAD BECOME HIS LIABILITY.

I am sure many of you, who had offered credit without due diligence and proper documentation, must have faced a similar situation. Here are the 5 ways by which you can avoid your receivables from becoming your liability.  

Proper Credit Documentation

Never ever offer credit to any customer without proper due diligence, and before signing and completing the credit related documentation.  Many a times, small businesses, in their eagerness to get associated with big brands and customers, tend to either overlook or ignore this very important step before offering credit.

Get Post Dated Cheques

Wherever possible, negotiate with the customers and offer them credit against Post Dated Cheque (PDCs).  For example, if you are offering 30 days credit, get a cheque which is dated 30 days from the date of invoice at the time of delivery of goods.  In many countries, bouncing a cheque is a criminal offence and hence businesses may be reluctant to issue PDCs unless they are sure of honoring it.  If customers are reluctant to issue PDCs for supplies within the credit limit, then insist on a PDC for supplies over and above the credit limit.

Get a Revolving LC or a Bank Guarantee

Ask the customer to open a Revolving Letter of Credit (LC) or give a bank guarantee against credit supplier. Most of the big businesses will have bank facilities and they should be able to provide you one of these. You can negotiate and share the bank charges with the customer.

If a customer is not willing to provide a PDC or LC or guarantee, then be careful with such customer. If people have intention to pay on time, they should not hesitate to provide PDCs, LCs or bank guarantees.

Take credit insurance

Another good way of protecting your company against failure of your customers to pay your debts is to take credit insurance against your major customers. Even though credit insurance comes at a small cost, it will help you to increase your sales by offering credit to the credit insured customers, since you are assured of payment by the credit insurer in case the customer defaults.  Look for a credit insurer who has coverage across cities and countries wherever you have customers.  It is extremely important to evaluate and negotiate the terms and conditions of various credit insurance companies before finalizing one of them. In one of my earlier companies, I used to deal with “Euler Hermes”, which is the world’s number 1 credit insurance company that has coverage across major cities in the world.

Don’t be afraid to say NO to a credit sale if you are not comfortable

It is very important to know when to say NO to a credit sale.  Even though Sale is the life blood of    business, if the customer is not regular in payment, if his receivables has crossed the credit limit, or if there are several unpaid overdue invoices, do not offer additional credit to the customer without securing the existing receivables. Credit department should have a mechanism to get the credit rating / standing of all their customers from the market, and reevaluate on a regular basis whether to continue to offer credit to customers.

About the Author

Govindraj is a CPA, CIA, CISA and has more than 25 years of finance, accounting, auditing, and IT experience.  He has worked as a controller and a CFO of many multi-million dollar companies. He is a Gold Winner under the category "Executive of the Year - Computer Software" at International Business Awards 2016 held at Rome, Italy, and a Bronze Winner under the category "Executive of the Year - Cloud Computing / SaaS / Internet" at Golden Bridge Awards 2016 held at San Francisco.  He has lot of experience in designing systems / processes, and implementing ERP packages in various industries.  He is the CEO of Cashpundit Inc. (www.cashpundit.com), a startup that he founded to help businesses to manage their collections and cash flows.

Credit Controllers - The Unsung Heroes

Written by Govindraj Muthyalu CPA, CIA, CISA

Have you ever heard a school or college kid saying “I want to be a Credit Controller”?  I am sure you have not.  However, you must have heard kids saying they want to become a Doctor, Engineer, Pilot, Teacher, Journalist, Astronaut, Accountant, Lawyer, Banker etc., but not a Credit Controller. Even though kids do not aim to be Credit Controllers, it is surprising to note  that there are hundreds and thousands of Credit Controllers across the world who are adding lot of value to their organizations.  

Most of the newly-hired credit controllers undergo on-the-job training to transition to their duties smoothly.  Credit Controllers are primarily responsible for collecting the debts and improving the cash flow of the company.  Credit Controllers’ role starts after a sales person brings a customer’s Purchase Order and ends after they collect the money from the customer.  It is said that “A Sale is a Gift until You Collect the Money”. In a way, Credit Controllers ensure that the sale does not become a gift by collecting the money from the customers.  Credit Controllers also work for debt collection agencies where they are responsible to meet set cash and debtor targets on a daily basis.

Though Credit Controllers contribute a lot to the company, they do not get the kind of recognition that sales, marketing, finance, and other departments get. On several occasions, people within and outside the organization dislike Credit Controllers for doing their job sincerely.

Credit Controllers and Sales Persons

Credit Controllers regularly liaise with sales department to resolve credit issues smoothly. However, sometimes there are situations when they decide not to offer credit to a customer. In such situations, the sales department thinks that Credit Controllers are creating road blocks because of which they are unable to achieve their sales targets and earn their sales commission.

Credit Controllers and CFO / FM

Many a times the CFOs / FMs feel that Credit Controllers are not doing enough to collect the overdue invoices, even though the delay in payment of invoices by customers may be because of issues like incorrect invoicing, proof of delivery, credit notes, or any other dispute which is not related to credit department. Credit Controllers are always under pressure from CFOs/FMs to collect their debts faster and reduce the DSO (Days Sales Outstanding).

Credit Controllers and CEO / Owner

Sometimes the CEO / Owner overrules the credit advice of Credit Controllers and offers credit to non-credit worthy customers because of  business considerations. In such cases, it is little frustrating for Credit Controllers to follow-up and collect the debts of customers to whom they had decided not to offer credit in the first place. 

Credit Controllers and Customers

Credit Controllers are supposed to be regularly in touch with customers and resolve all issues related to invoices and ensure that the money owed to their company is collected.  But sometimes there are situations when he/she has to put the customers’ account on credit hold if the customers default payment or customer’s credit situation changes.  In such situations the customers dislike the credit controllers even though they are doing their job as per company’s policy.

Conclusion

Credit Controllers are the Unsung Heroes of the company. They always put company’s interest above everything else, even at the cost of becoming bad people in front of others.  Day in and Day out, they think of collecting the debts of the company and doing whatever they can to ensure that the debt does not go bad. They are as much concerned about the liquidity of the company as CFO, FM, CEO and Owner are. All their decisions, like denying credit to a customer, giving credit advice to the CEO / Owner, chasing a customer for payment, are all in the best interest of the company.

I feel that, all the people within the company especially the Sales persons, CFO, FM, CEO, and owner should appreciate Credit Controller’s role and respect their decisions. After all, they are also working in the best interest of the company, and doing their best to protect the company from going bust by collecting the debts of the company.

About Govindraj Muthyalu:

Govindraj is a CPA, CIA, CISA and has more than 25 years of finance, accounting, auditing, and IT experience.  He has worked as a controller and a CFO of many multi-million dollar companies. He is a Gold Winner under the category "Executive of the Year - Computer Software" at International Business Awards 2016 held at Rome, Italy, and a Bronze Winner under the category "Executive of the Year - Cloud Computing / SaaS / Internet" at Golden Bridge Awards 2016 held at San Francisco.  He has lot of experience in designing systems / processes, and implementing ERP packages in various industries.  He is the CEO of Cashpundit Inc., a startup that he founded to help businesses manage their collections and cash flows.