Let Us Be Your Virtual Credit Manager
Your Source for Online Expertise on Managing B2B Credit & Collections at Small & Mid-Sized Businesses
Welcome to Your Virtual Credit Manager (YVCM). We’re two business credit pros who are sharing the knowledge and experience we’ve acquired during our combined 80 years of Credit & Collections.
In these challenging times, managing B2B accounts receivables for small and mid-sized business owners can be a daunting task. With every new customer, you have to ask will I get paid for my work? After the sale, the question too often becomes how do I get my customer to pay me? It can quickly get even more complicated than that, especially as your accounts receivable portfolio grows.
This is why we've created YVCM. As a subscriber, we will provide you with valuable Credit and Collections insights and best practices so you can more effectively manage your accounts receivable and free up time better spent building your business. Then, when you run into accounts receivables, credit and collections challenges that are beyond your team’s capabilities, YVCM stands ready to help you one on one.
Sign up now so you don’t miss any issues. For the time being, the weekly newsletters and all the content are free. However, effective June 30, 2021, we will be limiting the number of articles in the YVCM archive that are accessible with a free subscription. A standard subscription is $99.00 per year (or just $9.99 per month) and include 2 hours of online consulting and other advisory services in addition to all our online content. Premium subscriptions cost just $239.00 per year and include 5 hours of online consulting.
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Eliminate Barriers to Payment
And You Will Accelerate Cash Flow, Reduce Past Dues, Minimize Payment Deductions, and Increase Customer Satisfaction
David Schmidt and John G Salek
Much of the focus of AR Management is on Credit Risk, although outright default resulting in a bad debt loss is a rare event. Even so, the impact of defaults can be severe: a loss of revenue that require a lot of time and effort to generate. Compared to late payments, zero payment is a much worse outcome.
Late payments, however, are very common and their impact less visible. But when you have to borrow money to compensate for cash flow shortages, the impact of slow payments becomes very real and painful. Even though interest rates are currently low, they represent an additional, out-of-pocket cash expense. When they are caused by customers simply not paying per the agreed timeline, that’s very annoying. More annoying is when late payments are self inflicted.
An effective collections process will reduce the magnitude and duration of late payments. However, even a top notch collection process will be stymied by barriers to payment your company has caused. What are these barriers?
1. Invoice Errors: Anything that does not agree with the customer’s purchase order or is unclear
2. Order Fulfillment Errors: The wrong product or service, damaged goods, quality issues, shipping delays, etc.
3. Billing Delays: Failure to deliver a timely invoice in a format suited to the customer
4. Payment Obstacles: Failure to accommodate the customer’s preferred mode of payment
See below for a more detailed explanation of each of these barriers.
Feel free to contact us if you need assistance overcoming any of these barriers…after all that’s the whole premise behind Your Virtual Credit Manager.
Invoice Errors
How accurate is your invoicing? A quick way to find out is divide the number of credit memos issued for billing errors over a three month period by the total number of invoices issued during that time. The answer is the invoicing error rate (or Billing Quality Index). A BQI of 2 percent or less indicates a high level of invoice accuracy. If it’s higher, there’s need for improvement. Improvement is achieved through a classic process improvement program (identify high frequency sources of billing errors, determine root cause, implement corrective actions).
Invoice errors delay payment approval by your customers and may also cause them to make payment deductions. Besides accuracy, make sure your invoice clearly displays the recommended 27 elements of an invoice. This includes a non-technical description of the product or service you’re billing, so the customer can understand what it is you’re asking them to pay. For more on Invoice Accuracy, click here.
Order Fulfillment Errors
Did you deliver the exact product and/or service ordered in the correct quantity, undamaged, to the requested location, packaged properly?
If not, you will need to initiate an order fulfillment improvement program. Start by identifying high frequency sources of errors, determine their root causes, then implement corrective actions. Easy to say, not so easy to do, but the rewards are huge.
Billing Delays
If your business involves packing a product in a box and shipping it, the invoice should be triggered by the shipment’s bill of lading. Invoicing should be done same day, overnight, or the next morning at the latest.
If you deliver a service, the invoicing is usually triggered by a service ticket or notification attesting that the service has been delivered. Measure the lag between service completion and invoice date. Here again, it should be no more than a day or two. Service tickets should be transmitted electronically to the invoicing department if the service is not performed out of your billing location - no paper tickets should be mailed.
If your service is a subscription or maintenance/service contract, best practices dictate invoicing a month in advance of the service period start date.
Electronic delivery of all types of invoices, in a format acceptable to the customer, accelerates their receipt and subsequent payment.
Payment Obstacles
A great Customer Experience encourages repeat business. There are many elements that affect the Customer Experience. Accommodating customers’ preferred payment modes is one of them.
It may seem trivial, but for many small and medium size enterprises (SME), vendor invoices are paid in the evening or on weekends. Electronic payments which can be initiated from mobile devices are a convenient way to pay. Credit and debit cards also offer convenience and may provide points or miles to the cardholder.
Remember, you want to make it easy for your customers to pay. Stripe claims 75 percent of the invoices it delivers on behalf of its clients are paid same day! Most of these are probably consumers, not businesses, but the point holds. Make it easy for your customers to pay you.
Final Thoughts…
They key to eliminating barriers to payment involves knowing your customer and how they do things. After all, they initiate the sale, which is not complete until they pay.
Before e-commerce, the customer issued a PO or signed a contract, the supplier then fulfilled the order and issued a paper invoice, which the customer approved and mailed a check. There was only one format throughout the process: paper documents.
Without going into the details, today the process can vary by customer. Sophisticated buyers want to capture invoices electronically, but capabilities vary - so do their payment preferences. In addition to checks, today we now have ACH payments, card payments, and a growing number of alternative payment modes (e.g. PayPal, Venmo, Zelle, Stripe, etc.).
All this puts a burden on the seller to not only provide a level of product quality and service that at a minimum meets the expectations of the customer, but to also meet their AP function’s back office needs. Eliminating barriers to payment is therefore a big part of making it easy to do business with your company. The good news is, by minimizing your self-inflicted barriers to payment you will enjoy seeing your incoming payments accelerate along with sales.
Your Virtual Credit Manager was launched to give small and mid-sized business access to top level credit management expertise. That’s why advisory services are bundled with your paid subscription to YVCM. How can we help you?
Email YVCM for More Information
About The Authors
· David Schmidt is Managing Director of A2 Resources, a business credit consultancy founded in 1994, as well as being the Founder of YVCM. He is also co-author of “Power Collecting: Automation for Effective Asset Management” (J. Wiley & Sons, 1998).
· John G Salek is President of Revenue Management Associates, LLC, an accounts receivable & order-to-cash consultancy as well as being co-founder of YVCM. He is also the author of “Accounts Receivable Management Best Practices” (J. Wiley & Sons, 2005)
Full Speed Ahead for Collections
Maximize Your Cash Flow When Transitioning from Pandemic to Boom Economy
Most companies were adversely affected by the pandemic economy of the past 15 months. The degree of impact ranged from significant to serious to devastating. From delayed cash flow to bad debt, many companies were negatively impacted.
There are two opportunities for your firm to recover from these hardships in 2021:
1. Collect your share of the $3+ billion of cash committed by the last two stimulus programs enacted so far this year. These are “one time” inflows of cash that will soon be spent and gone. Forbearance programs for rent and loans will also expire. These have provided a huge benefit for tenants and borrowers, and large hardships for landlords and lenders.
2. Restore and increase your cash flow as the economy grows across most sectors over the remainder of 2021 and beyond.
Good News! But How?
First, you will need to Power-up Your Collection Efforts now. Here’s 5 tips for how to do that:
1. Make sure you have the right people handling collections. The first qualification is being comfortable asking for payment, followed by being accepting of the challenge. On top of that, the people handling collections need to be polite and project a professional decorum in their treatment of customers. Consider supplying refresher training.
2. Ensure you have enough collectors to adequately cover your customer base. A good collector can handle a 500-800 customer portfolio assuming there is a normal distribution of large, medium and small accounts, and there are not widespread product performance, service delivery or invoicing issues. But that’s a full-time job. Smaller firms may need to spread the collection burden out among several people, who also have other responsibilities.
3. Communicate the collection initiative to all customer facing employees so everybody is aligned. Also, enlist Sales and Customer Services involvement to provide a united front and assist in resolving disputes.
4. Establish Monthly Collection Targets for each collector. You might even offer bonuses or other incentives for those who meet and exceed their goals.
5. Equip your collectors with accurate information on the status of customer accounts. Most ERP and accounting software solutions have AR modules that provide this intel. There are also others ways to do this including fairly inexpensive collection automation tools.
Secondly, Utilize Order Holds to trade product/services for payments to accelerate cash flow. As economic activity picks up, you should see an increase in orders. Do not blindly fill these orders without first reviewing what is owed. Your customers are anxious to increase their revenue as well, so take advantage of your leverage. For customers who are significantly past due on their payments to you, trade order releases for payments (or promises to pay). Here’s 3 more tips for getting maximum cash flow benefit from new orders:
1. Inform all customer facing employees of your credit hold policies.
2. Ensure you have an air tight hold process (automated preferably), so that every order is held until a check of the customer’s receivable status is made. If the status is satisfactory, release and process the order promptly. If the customer has significant receivables more than 15 to 30 days old or the new order significantly exceeds the credit limit that has been assigned to the customer, have a discussion with the customer about accelerating payments (see #3).
3. Inform past due and over limit customers that their orders cannot be released until a substantial payment is received or promised to be paid immediately. If the customer has a history of breaking promises to pay, or the promise is for more than a week away, you should wait until the money is received before releasing the order. If the customer has any history of bad checks, wait until their payment clears (your bank can tell you) before releasing orders. Tough stuff, but necessary.
These two actions will enable you to recover much of the cash flow that may have been lost over the past 15 months. This is important from a good management perspective, but also for another reason:
There will be another wave of bankruptcies in late 2021 & 2022 - because companies kept alive by stimulus programs and forbearance, and not well positioned to gain from the economic recovery, will ultimately fail. Per Epiq/Aacer, bankruptcies declined in 2020 vs 2019, both consumer and commercial. These will both increase significantly in 2021 and 2022 if the track record from previous recessions holds true.
Editors Note: For more insight into business failures and bankruptcy trends, check out our February 22, 2021, post “Don’t Let Your Guard Down Yet.”
Consumer bankruptcies are likely to rise first, followed proportionately by commercial bankruptcies. Many other small businesses will simply close their doors. In light of this, accelerating collections and leveraging your credit hold mechanism will enable you to:
· Reduce your financial exposure to these companies
· Strengthen your cash position so you can survive those losses you do incur.
The Challenge and the Opportunity
The re-opening of the economy and the high potential for a jump in commercial bankruptcies present a challenge and an opportunity for your business. By ramping up your collection efforts and utilizing credit hold situations to accelerate cash flow will both protect and even improve the health of your business. The thing you don’t want to happen is a large bad debt write-off because your receivables are bloated when the next wave of bankruptcies occur. Act now to capitalize on the opportunity and strengthen your company to mitigate the threat.
About the Author
John Salek is President of Revenue Management Associates, LLC, an accounts receivable & order-to-cash consultancy and co-founder of YVCM. He is the author of “Accounts Receivable Management Best Practices” (J. Wiley & Sons, 2005)
Tackling Deductions with Limited Resources
How to Avoid Profit Dilution/Death from a Thousand Cuts
David Schmidt and John G Salek
Apr 27 1
Payment deductions (also known as chargebacks or short pays) are incurred when the customer pays less than the full invoice amount. They occur when a customer does not receive your product or service as ordered or feels the invoice is incorrect. Should you confirm that the customer is indeed correct, the deduction is removed from the accounts receivable (AR) ledger via a credit memo. If not approved, the disputed amount must be collected to avoid erosion of profit. And if not collected, it will be cleared by a bad debt write-off.
This all seems fairly straightforward, doesn’t it? Well, it’s not.
Many companies incur a substantial volume of deductions. The majority are relatively small dollar amounts that can “fly under the radar.” Many, however, require significant time to research to decide if the deduction is valid or invalid. Furthermore, 80-95 percent of the time, the internal investigation will determine that the deduction is justified. Part of the challenge with deductions is that they create a lot of work that at best only generates marginal benefits.
As such, unresolved deductions can create a mushrooming problem. The danger with not addressing deductions promptly is once the customer has taken a deduction they consider the issue closed. Contesting the validity of the deduction several months after the fact is annoying to customers, often dismissed, and usually unsuccessful.
The impact of deductions, especially if left unattended, can be substantial:
· Up to 2-3 percent gross margin erosion
· Huge productivity penalties to Cash Application, Collections, Customer Service, Sales, and Logistics resulting in higher costs and/or reduced performance
· Elevated AR – total and past due
· Serious degradation of the Customer Experience
· Employee frustration
· Potential over-statement of financial results (net sales, profit, assets,) and large one-time hits to earnings to clear backlog of aged deductions and disputes.
Why not just assign adequate resources to this problem, utilize a Best Practice Process, measure the improvement, etc.? Again, it’s not that simple.
As previously noted, the vast majority of deductions are valid. That means they are being caused by system weaknesses or other problems in the supplier’s order fulfillment process. The key to deduction management is therefore identifying and eliminating their root cause.
This means your deduction resolution activities, must also involve identifying recurring deduction types, so the root causes can be isolated and corrected. For example, recurring deductions of the same amount implies a price discrepancy that can be easily fixed pre-billing. Over time, such an approach will reduce the volume of deductions. Even so, deduction resolution can require an inordinate amount of resources, so here are some additional ways to reduce the volume of deductions that are researched.
1. Establish a dollar threshold below which you will automatically write-off the deduction without performing any research: The higher the threshold, the greater the reduction in volume to be researched. Be aggressive: researching deductions can consume $50-100 of labor costs because many of the issues will require responses from key managers and your sales team.
2. Negotiate allowances for shortages and damages as a price discount: If damage and shortage deductions comprised 1.1 percent of all sales to a customer, grant them a 1.1 percent discount off your price in return for their not taking any shortage or damage deductions.
3. Identify any customers taking a disproportionate number of unauthorized deductions: Deal with them directly about their practices.
4. Prioritize deductions to be researched: Deductions should be grouped by customer and deduction type. They can then be prioritized by value and probability of recovery. Here a few insights to help with prioritization:
o If a customer takes one of your credit memos twice, it is easy to document this and secure reimbursement. If they claim they received only 47 cartons in a pallet instead of 48, it is almost impossible to prove them wrong.
o Recurring deductions of the same amount. Something’s wrong – find out what it is and fix it
o Compliance Issues. These are self-inflicted deductions that result in penalties or fines typically because the supplier did not adhere to the buyer’s delivery requirements - everything from labeling issues to how many boxes can be stacked on a pallet to delivery windows.
5. Ensure you have the right people researching and resolving deductions: The first qualification is liking deductions research. The second is knowledge of your Order-to-Cash process.
6. Implement a best practice process flow: This should cover creation of the deduction in Cash Application through to its clearing from the AR Ledger. Key attributes are:
o Tracking of deductions from creation to clearing
o Routing deductions to resolvers who are positioned to research it quickly and efficiently (e.g., sales tax deductions should be routed to your Sales & Use Tax expert, not Logistics, and pricing issues should be routed to sales administration, etc.)
o Time limits to clear deductions and Escalation protocols: If a deduction is not resolved within parameters it should be routed to the next higher authority for action
o Measure the operation and results. Key metrics are: volume incurred and volume cleared in a month, backlog (volume and age) at month-end, number and value deemed invalid, number and value of invalid deductions collected.
7. Deduction Management Workflow Software: If your deduction volumes are substantial (this is a likely situation if you are selling consumer products to retail chains), you should consider investing in deduction processing automation. The major ERP systems have useful applications for identifying deductions. There are, however, several excellent Best-of-Breed applications on the market that will automate and accelerate most of the deduction resolution process, delivering enormous productivity gains as well as increased recovery of invalid deductions. These applications employ Robotic Process Automation (RPA) and Artificial Intelligence (AI) to automate most operations previously performed by humans. They also have advanced analytics capabilities which accelerate improvement in Order Fulfilment and reduce the number of deductions incurred.
8. Outsourcing: There are also a number of firms that will perform deduction research and resolution for you. This requires them to connect with your ERP and AR systems to download transaction data and possible place their employees are your site. Setting up an Outsourcer requires a significant one-time investment as well as continued monitoring and modification. It can be an excellent long term solution in the right situation as well as a short term fix to get a deduction backlog under control. Remember, you outsource the activity, not the accountability.
Conclusion:
If your customers take a significant number of deductions, it is a problem that cannot be ignored. Over time, the impact of deductions will be a significant reduction of your profit. As with any business operation, deductions processing will benefit from good policy, process and people. Given its high volume/low return nature, it demands technology and automation at all but the lowest volume levels.
At Your Virtual Credit Manager, we stand ready to recommend deduction management software or outsourcing vendors that will fit your needs, or simply help you overcome specific deduction processing challenges impacting your organization. Don’t hesitate to contact us.
Success Stories…
A $350 Million Medical Products Distributor had no formal Deductions Resolution Process. Deductions were not addressed but left to age to 180 days, then written off. To improve the situation, this firm instituted a formal deduction resolution process. As a result their focus moved from items that were over 90 days old to processing all deductions in under 30 days. They also improved tracking and reporting of open disputes by responsible party. The results:
· Recovery of over $500K of invalid deductions (pure profit)
· Over 90 day receivables reduced by 70 percent
· DSO reduction of 16 percent
Another client reduced the number of deductions to be researched by 40 percent by raising the small balance write-off threshold. They realized a huge labor savings well in excess of the marginal 2 percent of deduction value that may have been recovered.
There Is More to Do Once the Customer Pays
Efficient Remittance Processing is a Critical Back Office Function
David Schmidt and John G Salek
Remittance processing is a true “back office” process. If everything goes according to plan, nobody notices. However, any departure from the routine can lead to posting delays in addition to impacting future revenue and cash flow, alienating customers, and increasing administrative costs. Who would’ve thought?
Remittance Processing (also know as Cash Application or Cash Posting) is the process of recording customer payments and applying them to the corresponding open (unpaid) invoices in the accounts receivable ledger. It needs to be performed quickly (same day or next morning after receipt of customer payment) and accurately (as the customer directs in their “remittance advice”). The result of timely and accurate Remittance Processing is an accurate Accounts Receivable (AR) Ledger, which provides the current status of every customer’s balance owed to you.
An inaccurate AR Ledger can have the following negative effects on your company:
· A delay in fulfilling customer orders which in turn can delay revenue and cash flow. This problem evolves from orders incorrectly held because of invoices that appear not to have been paid. In reality, those invoices have been paid, but appear to still be open or even past due because the customers’ payments have not been applied to the open invoices.
· Alienation of customers whose orders are unjustly held up because their payment has not yet been applied. To add insult to injury, the situation is exacerbated by collection calls from the supplier, albeit innocently made in an attempt to get the order released from the credit hold queue.
· Having to pay somebody overtime to clear an backlog or unapplied remittances or to correct misapplied payments.
· Higher delivery costs caused by overnight shipments to customers whose orders were inadvertently delayed due to a remittance processing lag. These costs cannot be charged to the customer.
· Additional costs (overtime pay) in Customer Service, Logistics and Sales to expedite orders inadvertently delayed.
· Wasted Collection effort – contacting customers to pay invoices they’ve already paid.
Who would have thought slow and/or inaccurate Cash Posting could have such a large negative impact on your company? Prompt and accurate Cash Application is an absolute requirement for running a successful, profitable business.
Solution
1. Apply Customer Payments Accurately: Customer payments must be applied to the open invoices specified by the customer – no exceptions. It is their right to specify which invoices they are paying. It’s their money. If they do not specify which invoices they are paying, or their instructions are unclear, you must secure that information from them. This avoids “Misapplied” cash, which causes many of the problems listed above. We once worked with a Fortune 50 client whose penalty for disregarding client remittance instructions was dismissal.
2. Apply Customer Payments Promptly: Promptly is defined as same day or next morning. This minimizes the chance of incorrectly holding a customer order because of it exceeding acceptable past due parameters or its specified credit limit, and prevents all the customer relationship and cost damage that causes.
What’s the Best Remittance Processing Solution for Your Situation?
At low payment volumes, payments can be posted manually in your AR system. As payment volumes grow, and the application of payments becomes a full-time clerical job, automated remittance processing solutions should be explored.
Cash Application involves reading the customer’s remittance advice, then applying cash received to open invoices. When invoices are paid in full, the payment is easily matched to the open invoice(s), and the invoice status is changed from “open” to “paid”, and is no longer visible on the customer’s account in your AR Ledger. Transaction completed and closed.
However, if the payment is less than the invoice amount, the amount of the payment should be matched to the appropriate invoice(s), and the residual amount (also known as a short payment, deduction, or chargeback) posted to the AR Ledger as an open obligation owed.
If you have sufficient check volume, your bank’s lockbox service can help by providing a detailed remittance file. How detailed the file will be is dependent on the amount of information your company needs to drive your automated process. At a minimum, the bank lockbox will generate a daily file of all payments received on your behalf, and if you are willing to pay for the data entry of the remittance details (also known as the payment advice), you also get the specific invoices being paid and for how much for each customer. You can use this file to manually or automatically apply the customer payments to your open invoices.
Most ERP or accounting software systems have auto-cash capabilities. “Bolt-on” software applications are also available to facilitate automated remittance processing. Using machine learning and artificial intelligence, the most advanced solutions will electronically read the customer check and accompanying remittance advice, thereby eliminating the need and cost of data entry by your lockbox bank.
The advantages of auto-cash solutions are:
· Speed – most cash can be applied the same day it is received
· Productivity – the application applies the cash, not your employee. Even at low match rates, labor savings are substantial. Match rates can range over 90 percent, but even a 50-60 percent match rate (considered to be low) saves much of the manual effort.
Bottom Line: The remittance processing solution you deploy should directly correlate to the complexity of your payment posting environment and your labor costs. Your Virtual Credit Manager is available to answer your remittance processing questions and help you find the best solution for your circumstances.
Case Study in What Not to Do:
An apparel company with sales of $200 million annually had approximately 5,000 small and medium size customers. In an effort to reduce the reported amount of past due receivables, the Controller required that all customer payments be applied to the oldest open invoices, disregarding the customers’ instructions (remittance advice).
Customers subsequently received collection calls on invoices they had previously paid. The apparel company’s AR Ledger showed those invoices to be unpaid because they disregarded the customers’ remittance advice. This problem affected most of their customers. As it compounded, a substantial number of customers declared that they were not going to make any more payments until the ones they made were applied properly. This caused a big drop in cash flow. To solve the problem prior payment applications had to be reversed, then re-applied as the customer intended. The company had to hire, train, and retain a team of 15 people for eight months to accomplish this task, a considerable expense compounded be the reduction in cash flow.
Clearly, an illustration of “what not to do.
Approving Orders Involves More Than a Simple Yes
Don't Approve Orders Unless These Parameters Are Met
David Schmidt and John G Salek
Apr 25
Reviewing and correcting incoming orders is essential to avoid creating costly Accounts Receivable issues. By the same token, promptly processing orders and avoiding unnecesary credit holds will facilitate customer satisfaction. Fulfilling a customer’s order according to customer expectations of quality and timeliness of delivery, then invoicing it promptly and accurately is critical to unimpeded cash flow and the avoidance of unnecessary costs.
Problems in the order-to-cash process start when customer orders get passed along without a comprehensive order review. These problems include slow payments, partial payments, a dissatisfied customer as well as extra costs should the order need to be reworked, a return processed, credit issued, or re-invoiced. In other words, a costly fire drill. The long term effect involves driving customers to the competition and a lower volume of sales to those accounts that remain.
1. Confirm the order details are within acceptable parameters: Can you physically fulfill this order and satisfy the customer? Or, are there provisions or specifications you cannot meet? If you cannot meet your customer’s expectations, you need to address the potential discrepancies before approving the order. First of all, are the commercial terms and conditions acceptable?
o The unit price, quantity, and total price (Clearly stated including all volume discounts)
o Applicable sales or use tax
o Freight/delivery (Actual vs. allowance - Who pays freight?)
o Payment terms (When is payment due? Is their an early payment discount?)
o Issuance of the invoice (Upon shipment, at the start or completion of a project, upon reaching a milestone?)
If the discrepancies with the customer’s Purchase Order are significant, seek an amended PO from the customer. For example, if your quote states payment terms of Net 30 days, and the customer PO stipulates Net 60 days, unless you secure an amended PO, you will be paid in 60 (or more) days. If the discrepancies are minor, you may want to accept the order, while issuing an order acknowledgement that addresses the discepancies (see #3 below). The discrepancies that will cause the most damage vary by business, but generally they are:
o Performance standards of the product/service and warranty
o Unit pricing and volume discounts
o Payment terms
o Packaging and delivery requirements
Once an amended PO is secured and reviewed, you can proceed to the next step of order fulfillment.
2. Check the Credit of the Customer: Is the customer’s receivable balance substantially in excess of the credit limit? Or, are they significantly past due? If so, inform the customer that their order will be held until they make (or promise to make, if you trust them) a payment that will bring them in line with your standards.
If the customer’s credit rating is so bad that you require payment in advance, secure the payment and ensure it “clears” your bank before fulfilling the order. If and when the customer’s credit rating and receivable status is acceptable, proceed with processing the order.
3. Send an Order Confirmation to the Customer: This is an important step to acknowledge receipt of the customer’s order and to advise them of the probable ship/service fulfillment date. It should include a caveat stating that fulfillment is subject to change based on the customer’s credit status (which may change between the order approval and fulfillment date), unforeseen events (Acts of God, natural disasters, etc – an attorney can help with this wording).
However, do not expect your order confirmation to override your customer’s Purchase Order (PO). If there are elements of the customer’s PO you to which you object, you must secure an amended PO.
What Not to Do…
A medical device company had no formal review of orders. They accepted orders phoned in by their sales force “on behalf” of its physician customers. The result was a real disaster.
Customers refused and/or returned shipments stating they never ordered the products. Sub-optimal pricing was rampant. Payment terms were frequently extended or never mentioned. The company suffered from swollen AR, the high cost of returns, and excessive price discounts.
Clearly, an illustration of “what not to do.”