Reprinted by permission of The Kaplan Group
As a Receivable Savvy Collaborator, The Kaplan Group provides insightful information for the benefit of our readers in the area of commercial credit collections.
Airtech Corporation is an Arkansas based distributor of HVAC equipment with annual revenue of $35 million. Despite giving net 30 terms, their average days sales outstanding (DSO) was running at 60 days. Management recognized there was a significant problem and with changes in technology and procedures was able to reduce DSO to 42 days and free up nearly $2 million in working capital.
While many customers paid on time, a significant percentage were paying 1 to 3 months late. The high DSO meant that on average $3 million in receivables were past due. This capital was not available to Airtech for paying vendors which created issues. They struggled with their internal debt collection process. The sales team had to put in extra effort to keep customers happy and make sure orders were not lost due to credit holds.
Management recognized that a key weakness was their accounting system. While Microsoft’s Dynamics Great Plains system has been used by millions, it did not have advanced accounts receivable functionality. Airtech would run an aging report twice a month, then start calling customers and manually sending paper statements and invoices. It took one person half a day just to print and mail all this paper.
Many companies, including Funding Gates, DAKCS and e2b teknologies have developed software that integrates with most accounting systems to provide advanced receivables functionality. These programs have advanced reporting capabilities which help you instantly see the health of your receivables. They allow you to quickly identify problems and problem accounts. The internal note taking system allows everyone in the company, who has permission, to see what is happening with the account and past due receivables. The user can set rules so that reminders and notices are sent automatically via email when appropriate.
Airtech chose to implement e2b’s Anytime Collect software. The automated delivery of statements and past due notices resulted in an immediate time savings and improved rate of collection. In addition, the software helped Airtech prioritize accounts for their internal collection efforts. With more time to focus on the key accounts, Airtech was able to bring money in faster and reduce bad debt risk
Not only has DSO improved, but write-offs are lower. This is not surprising since the likelihood of never getting paid increases more than 1% every week an invoice is past due. By the time an invoice is 90 days past due, the chance of a write off is already 26%.
Barbara Capps, Airtech’s business manager in charge of collections, was also pleased by how customers responded. “I found that we got immediate feedback from customers who would shoot back a question or comments on invoices as soon as the statement was received in their inbox. This really opened up our lines of communications with our customers, resulting in much quicker payments and improved our customer service capabilities.” The system automatically stores and retrieves customer email responses, tags them to the credit issue, and allows anyone with system access to have the entire communication history at their fingertips.
These software packages are easy to integrate with existing accounting systems. The price can be as low as $40 per month. So, even for much smaller companies, they can be affordable and create big improvements in productivity and cash flow.
Of course, software alone cannot prevent bad debt. That’s where The Kaplan Group can help. We have an 85% success rate on large viable claims. Once an invoice is 90 days past due, it needs extra special attention. The likelihood of a write-off increases from 26% to 50% by the time the invoice becomes 7 months delinquent. The sooner we start assisting you with the problem accounts, the greater the likelihood the claim will be viable and we’ll be sending you money. Best of all, there is no upfront fee for this service – we get paid when we send you a check.
Dean Kaplan is Principal at The Kaplan Group. Dean’s expertise is widely recognized in the debt collection industry. His advice has been published in a number of industry newsletters such as Credit Today and InsideARM and he is a frequent speaker at industry events.