by Ken Green
As with any other industry, collections can also be negatively impacted by a slowing economy. In order to limit risk, companies tend to tighten credit terms during hard times. This tightening reduces the amount of credit outstanding – which collection companies rely on in order to stay in business. Other factors, such as business failures, also contribute to a decline in collectible funds. The old adage, “Can’t draw blood from a turnip” is often heard during hard times.
The late 90’s through mid 2000, all industries, including collections, experienced rapid growth … growth that was related to our booming economy. As companies entered into a market or attempted to gain market share, they often extended liberal credit terms in order to make the sale. As long as our economy ran strong and growing at the rate it had, the need for collections also grew. Bad debt is a reflection of total sales (i.e. a percentage of sales always going to bad debt). As sales decrease, so will bad debt – but not necessarily in percentages.
However, over the past few years, our country (and the world) has seen a dramatic change (or shift) in our economy. Many companies have lowered their revenue and growth projections to unprecedented levels. As we have seen, the major declines in employment and GDP, coupled with increases in bankruptcies have caused many to feel anxious and concerned about the future. Organizations have reverted back to conservative measures to maintain market share and/or profits. In the long run, efficient companies will run leaner and work on improving cash flow.
Although companies believe that sales are the life blood of any organization, cash flow can make or break a company. Without it, companies will continue to go into debt or worse, go out of business. It is imperative that as a credit/collections manager, treasurer, or even a CFO, you quickly identify customers that maybe experiencing cash flow problems.
Some key identifiers include:
- Late payments
- Several requests for increase in credit limit
- Extension of credit terms
It is important that the above identifiers are common and may not mean a stop in business (or payments). However, in lean times, it is best to use these indicators to help identify potential problems. Only you know your customers traits and trends.
At Van Dinter & Associates, we help companies identify potential cash flow problems and look for ways to improve it. Our professional approach has helped identify and resolve issues with customers that are experiencing cash flow problems.
To learn more about “Credit & Collections in a Down Economy” and methods and procedures to help mitigate the your risk, please contact Ken W. Green, Executive Vice President, Van Dinter & Associates, Inc. 877-643-4549 or email: ken.green@vdacollect.net