You have manufacturered a product, made a sale and made a good margin, right? If the sale was made on credit, the story is far from over.

A sale is an expense that continues until the money is deposited in the bank. The “real" margin of that sale is not realized until that time. For that reason, the accounts receivable department should be a very active, rather than passive, part of the revenue cycle.

As with most things, a good accounts receivable department starts with a active credit and collection plan. Credit is used to make sales easier but should not be controlled by the sales department. Upper management should determine what constitutes credit worthiness based on sound cost benefit evaluation. This policy should be passed to the sales employees and accounts receivable department in written form. Because any variation of this policy changes the dynamics of the sale; exceptions to the provided documentation should be made only rarely and by upper management.

Proper evaluation of the potential customer is the next area of importance. While credit reporting agencies are important, the clients trade history is more indicative of what you can expect. Another consideration is how valuable your product or service is to the customers revenue cycle and the likelihood of finding another source. Based on these and other evaluations, a credit limit and terms should be determined and conveyed to the customer up front.

Now your customer has your product or service and you have a bill. Here is where proper customer interaction starts. It is necessary to communicate your expectations with your customer as soon as the account reaches its first mile stone... their due date. If the customer is trying to conserve his cash, he might hold payment until contacted. The interaction is much more pleasant at 32 days than at 3 months. If he knows that he will receive a call from you, chances are that he will delay someone else. If a payment is promised within a certain time frame, a tickle file should be set up to make sure that the time does not pass unnoticed.

If after all of the massaging the accounts a collection effort ensues, there are some things to keep in mind. It is better to get a tiny amount often than to wait for them to be able to pay the whole amount. Clients should be able to pay some amount if they are attempting to make a good faith effort; and every dollar paid cuts your losses by that much. If the amount involved justifies it, inform the customer that you will have someone come by and pick up the payment if they are local, or have a courier pick it up if not. That puts them up against a hard deadline to write the check. If possible, get the payment plan in the form of a promissory note. This gives the debt a higher position in case of a bankruptcy.

The old addage an ounce of prevention is worth a pound of cure absolutely applies to all accounts receivable department. With the proper realization of the cost of overdue invoices and a dedication to the proper management of the accounts, this department will contribute a lot to your revenue cycle.