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

The opportunity cost of money 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 successful accounts receivable department starts with a good credit and collection policy. Credit is used to make sales easier but should not be controlled by the sales employees. Upper management should determine what constitutes credit worthiness based on sound cost benefit evaluation. This policy should be conveyed to the sales group and accounts receivable department in written form. Because any variation of this policy changes the dynamics of the sale; exceptions to the review should be made only occassionally and by upper management.

Proper evaluation of potential customers 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 thing to consider is how valuable your product or service is to the customers revenue cycle and the ease of finding another source. Based on these and other evaluations, a credit limit and terms should be determined and provided to the customer up front.

Now your client has your products or services and you have a bill. Here is where proper customer interaction starts. It is necessary to convey your expectations with your customer as soon as their account reaches its first mile stone... their due date. If the client is trying to conserve his cash, he might hold payment until you contact him. The contact 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 put someone else on hold. 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 remember. It is better to get a small amount often than to wait for them to be able to pay the whole amount. They should be able to send some amount if they are attempting to make a good faith effort; and every dollar received cuts your losses by that much. If the amount involved justifies it, inform the customer that you will have someone stop 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 specific deadline to write the check. If possible, get the repayment 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 definately applies to the accounts receivable departments. With the proper realization of the cost of outstanding invoices and a dedication to the constant vigil of your accounts, this department will contribute its part to the revenue cycle.