A/R Survival Tactics

Things to do to better survive the economic downturn.
Abe WalkingBear Sanchez, president, A/R Management Group, Inc.

Editor's Note: This article began in the print edition of the December 2010/ January 2011 Contractor Supply. The complete text of the article is presented here.

Credit customers are taking longer to pay and the risk they may fail to pay altogether grows daily. If customers fail to pay you within terms, or not at all and you run out of money, how will you pay the landlord, the IRS, the power company, employees and suppliers? If you can’t pay your bills, are you out of business?

If you haven’t already done so, you need to identify and embrace your core customers. Think of the 80/20 rule. Do 20% of your customers make up 80% of your business? If so, you had better know those 20% customers, their needs and desires and the names of their kids.

The same 80/20 rule applies to your A/R, that short term money due from customers based on the purchase of a product or service based on payment at a later date. Often 20% of the credit customers make up 80% of the money due. Rather than working your past due A/R alphabetically, work them based on largest amount first.

Always remember, the vast majority of past due customers are not trying to avoid payment or beat you out of your money. Your customers may well be having their own cash flow problems, and even during tough times the vast majority will pay, so don’t fall into thinking that your past due customers are all type threes (see below).

Don’t use negatives like “debtor” when speaking of the guys who put the food on the table; don’t think of past due A/R Management as “collections,” the enforcement of payment. Remember that the most profitable sale is most often the repeat sale and that there’s a cost factor of 8 to 16 times as much involved with finding a new customer versus keeping an old one.

All Past Dues are One of Three Types:
Type 1) Slow Pay Customers. Profile: stable companies in a stable industry, have the ability to pay, have a history of paying slow. They are either disorganized (small businesses and government) or some larger companies  that pay slow as a way of practicing cash management, i.e. using suppliers as a form of short term financing — and they won’t pay late charges.

Type 2) There’s a Problem on the Account. Profile: the problem on the account is either Systems in nature (something went wrong somewhere) or Financial in nature (customer’s inability to pay). Some examples of Systems Problems are sales/service disputes, shortages/overages, wrong or missing PO or reference numbers, late delivery, returns waiting for credit, unauthorized purchases, damage, incomplete paperwork, sales guy promised extended terms without authorization, flood, famine, fire, oil spills, etc. Murphy was an optimist: Type two Systems problems often make up the largest percentage of all past dues and can originate anywhere in the supply chain.

Type two Financial Problems, where the customer is unable to pay, can be further broken down to type two Temporary Financial that are short term in nature and type two Serious Financial that are long term in nature.

Some examples of type two Temporary Financial problems are customers experiencing a short term unexpected loss or cost of doing business like having to replace a piece of equipment or a theft, the customer billing their down-line customers only once a month and waiting on payment, seasonal business slow down, etc.

The KEY to a Temporary Financial is that the customer will be able to pay in the near term of 10 to 30 days.

Examples of type two Serious Financial problems are IRS liens, law suits, loss of largest customer (the old all-eggs-in-one-basket scenario), sales managers going into business for themselves or going to work for a competitor and taking the best customers and sales guys with them, divorce in a “ma and pa” company, death of key person, new competition, etc.

The KEY to type two Serious Financial problems is that they are long term in nature and the customer can’t commit to making payment. BIG RED FLAG.

Type two Serious Financial problems represent a 90% chance of failure, loss or bad debt write off. This is where the bankruptcy notices come from.

Type 3) Avoiders. Profile: These customers are uncooperative, they will lie about things, they will make and then break arrangements/agreements and very often they will skip out. The only good news about type three Avoiders is that if you have done your due diligence on the credit approval, they often make up the smallest percentage of past dues.

Past due A/R management is not “collections,” the enforcement of payment, except for dealing with type three accounts. Past due A/R management is “The Completion of The Sale,” and the goals are:
1) Keep credit customers current so that they keep coming back to you with that next order. The most profitable sale is most often the repeat sale and each repeat sale should be more profitable than the one before. A by-product of keeping credit customers paying is good cash flow and sleeping nights.
2) Identify early on the small percentage of credit customers that represent a potential for loss  (type two financial serious, long term and type three Avoiders) and control bad debt, not run scared of it.

The Four-Step Sales Approach To Completion of The Sale
There are four basic steps in a sale, and in the Completion of the Sale.

The first step in any sale is to contact the decision maker, the person who can approve a purchase. The first step in Completion of The Sale is to contact the person who can tell you when, and just as important, why the account was not paid within terms. Sometimes in larger companies the decision maker may be an A/P manager or CFO; in smaller businesses the decision maker may be the owner. Just as in Sales, the management of past due accounts requires the ability to communicate effectively and to establish and maintain good working relationships.

After working on the person to person relationship, i.e. knowing and using the person’s name, them knowing your name, knowing something about the company or the person and making some small talk, move to step two.

The second step in a sale is determining the customer’s needs or desires by asking questions and then listening to the answers. The second step in The Completion of The Sale is to determine the reason why the customer hasn’t paid — the type that they fall into. The best opening line is one that asks for the customer’s assistance; “Our records show invoice # so and so, with this date for this sum as still being open. Can you help me please?”

Then listen for the customer’s response and based on that response, determine the type. If you aren’t sure what type a past due account falls into ask more questions. Once you have established a type, move on to step three.

At this point, we have to believe what the customer says. If they lie, we’ll soon know it.

The third step in a Sale is making a presentation on how the product or service meets or exceeds the customers’ specific needs or desire In The Completion of The Sale it’s the same as in Sales, a presentation is made specific to the customer Type or reason for the account being delinquent.

Type 1 presentation. Whether it is a large company practicing cash management; a small “ma and pa” that would be happy to pay if they could find the paperwork that’s lost on their desk; or a government agency unable to find the right information in their computer system, you must be a friendly squeaky wheel — you call early and often. Take a friendly interest in the person you are speaking with, but not too friendly.

Type 2 presentation. Systems related problems (something went wrong somewhere) caught early are much easier to fix. Those systems problems not identified and resolved early on may lead to a time-consuming reconciliation of the account and to the loss of customer goodwill, for if the source of the problem is on your end, it creates a sore spot for the customer. Regardless of the source, type two Systems problems create additional costs of doing business for everyone.

Stay on getting problems fixed and then “fix” the source if you can and drive down both your and your customer’s cost of doing business.

Financial problems where the customer can’t pay must also be identified early on as being either temporary or short term in nature or serious and long term in nature. In dealing with a short term problem, where the customer can’t pay now but will be able to pay in the near future, you want to work with the customer and encourage them to continue buying from you on credit terms and not jump ship to your competition just because they are in a short-term cash bind.

Ask that they pay the current invoices and that you will then apply the money first to the older invoices so that they don’t age out. Consider adding 5 percent to each future sale until the past due amount is paid. Be sure to tell the type two financial temporary customers that they and their business are valued and thank them for that business.

During a presentation to type two Serious financial problems where the customers can’t pay and have no idea when they will be able to pay (and who represent a 90% plus risk of failure) the customer must be told that first, no additional credit will be issued and that their account is on “credit hold.”

Never place a customer on credit hold without telling them because you don’t want to put them in a position where they are making plans or commitments based on having an open line of credit just to find out it is not so. Let them know that you are sorry about whatever led to their situation but that no further credit sales will be allowed. Communicate the credit hold to everyone in the company that interfaces with the customer, including branch operations.

With type two financial Serious customers, time is of the essence. Once you’ve placed them on credit hold you must move quickly to improve on your position. Examples of improvement of position; convert the A/R to a note with additional security i.e. a Personnel Guaranty, a lien on real property, a qualified cosigner, a joint pay agreement.  Consider a barter or trade-out or a return of goods if available. Improve your position at once, don’t delay or there may not be anything left to improve upon.

If you are not sure whether a customer is financial temporary or serious, go back and re-check their credit and try to verify the source of the money they claim they will be paying you with because there is a world of difference between the two.

Type 3 presentation. Avoiders, those who lie and break arrangements and skip out, need to be identified as early as possible just like type two financial serious accounts for they also represent a potential for loss. Cut off credit sales to type three accounts and then assign them to an enforcer. Do not take valuable time that could be spent working with type one and two accounts to try to force type three’s to pay.

The forth step in a sale and in The Completion of The Sale is the close and follow-up. Closing is a matter of repeating your understanding of who is to do what and by when. Ninety percent of both Sales and The Completion of The Sale is follow-up so make sure you calendar the accounts for follow-up. Keep contact notes and if a customer lies, this is where and how you will learn it.

During hard economic times the amount of past due money found to be type 2
financial will grow and it's important if not critical that they be contacted and identified early rather than late. Past due A/R  follow-up contact should start at 3 to 5 days after the invoice is due.

Everything else being equal who do customers buy from, someone they like or someone they don't like?   Everything else being equal who gets paid first, someone customers like or someone they don't like? Too often the wrong people are involved with the Completion of the sale.

Calling Credit Customers Before They Are Even Due

Consider calling every new credit customer early on the first invoice (prior to due date) to ensure that it was received and that all is well. If anything can go wrong it is often on the first sale to a new customer. This contact is called the Post Sale Follow-up Call.

At the time of first contact with a customer begin the relationship building and keep notes on what you learn about the A/P person and about the company.

Also you may want call credit customer early (prior to due date) on large dollar invoices. If things go wrong with large dollar invoices you want to know and be on top of fixing whatever went wrong as soon as possible.

The Daily Call Report

Employees respect (do) what management inspects (measures) and not what
management expects.

You might want to consider asking whoever is responsible for past due a/r
management (The Completion of The Sale) to keep a Daily Contact Report and
if you do you'll find that more calls/contacts are made thus leading to improved cash flow and to more repeat sales.  Example:

Daily A/R Analysis
Prepared by:_____________________

Money By Type
Acct #____________________________  
Name ____________________________  
Total $____________________________  

I Slow Pay

II  Systems Problems
     Financial, Temporary
     Financial, Serious
III  Avoiders



Note the dollar amount column on the report, the accounts should be worked by largest dollar amount first. The amounts should be in descending order. Also note that the account Type should be completed, thus indicating that the correct presentation was made to each type.

©Copyright 1982-2008 A/R Management Group, Inc.  All rights reserved

Compliment The A/P People
Accounting people never seem to receive any compliments so look for the
opportunity to compliment the A/P guys you contact, in fact look for an
opportunity to send a written compliment.  Here is an example

Sample Immediate Supervisor Letter


Person's Supervisor
Name of Company
City, State Zip

Dear Supervisor name,

In the course of doing business, a special person occasionally comes along
that handles themselves in an exemplary and professional manner.

We would like you to know that _______________________ has represented your
company in the best possible way.

We feel that when someone has done an outstanding job we should take the
time to recognize it and let you know that we appreciate it.

Best Regards,

Your Name
Your Title

copy: The person you wish to compliment

Action Items:

1) Have your A/R ageing (ATB) printed out by largest dollar account vs.

2) Start Doing Post Sales follow-up calls on first invoices and large dollar

3) Have the people making contacts keep the Daily contact report and make
sure you review it Daily

4) Consider sending written compliments to the A/P people working for your
larger customers

5) Use the Four Step Sales Approach when contacting past dues

6) Tell whoever is making contact with customers that the job is not
"collections", That it is the Completion of The Sale.

Keep Best Customers Close
A culling of the herd is taking place. Keep an eye open for opportunities to pick up failed competitors, their good employees and good customers.

Remember the 20% of customers that make up 80% of sales? You need to know how any downturn in business would effect them; they may be your buddies now but if they fail, you don't want them taking you down with them. Run credit reports on core customers on a regular basis to help you remain confident of their ability to pay...and to possibly increase their credit line, if they need and can handle an increase. CS

©Copyright 1982-2008 A/R Management Group, Inc.  All rights reserved: Abe WalkingBear Sanchez is the developer of the copyrighted Profit System of B2B Credit Management: a proven philosophy and set of methodologies that move the credit function from being a cost center to a profit-driven area of business. President of A/R Management Group,Inc. (, Abe WalkingBear Sanchez  is also a founding member of the international Profit Centered Credit Group.