Improving the Order-to-Cash Cycle
Credit Review and Decision
New Customer Application—What Information Should Be Requested?
Tips and Techniques: What a Very Detailed Application Should Contain
Customer’s full legal name (a legal name, not a DBA [doing business as])
Customer’s physical address (the address where billing information is sent)
Customer’s phone/fax numbers and e-mail address as well as Web site address
What type of business it is:
Proprietorship
Partnership
Limited liability partnership
Limited liability company
Corporation (state whether a “C” corporation or a Subchapter “S” corporation) (the date and state of incorporation and whether it is a private or public firm)
Joint venture
Nonprofit corporation
Government agency (town, city, county, state, or federal)
Phone/fax number and e-mail address of the accounts payable area that will have responsibility for paying this account
If this is a proprietorship or partnership, the name(s), address(s) and home phone number(s) and e-mail address(s) of the owner(s)
Corporate parent’s name, address, phone/fax numbers and e-mail address
Whether it is a division, subsidiary, or affiliate of the parent corporation
Date firm started
Type of firm that it is:
Manufacturer
Distributor
Retailer
Service firm
Other
Credit limit requested
Dun & Bradstreet Dun’s # (identification number for companies)
Bank reference information, including:
Bank name
Bank address where account is
Bank account number(s)
Type of account(s) with the bank
What type(s) of collateral (if any) the bank has a lien on
Whether a personal guarantee has been given to the bank by the officer(s) of the firm
Bank officer’s name in charge of its account
Bank’s phone/fax numbers as well as e-mail address
Signed permission form to provide to bank to obtain a reference
Trade references information, including (minimum 3, maximum 4):
Trade reference company name
Trade reference company’s address where account is
Account number(s) with the trade reference company
Type of account(s) with the trade reference company
What type(s) of collateral (if any) the trade reference company has a lien on
Whether a personal guarantee has been given to the trade reference company by the officer(s) of the firm
Credit manager’s name in charge of its account
Trade reference company’s phone/fax numbers as well as e-mail address
Signed permission form to provide to trade reference company to obtain a reference
The credit application form should request the name of at least two references that would be similar in nature to the credit extender, such as
(1) the supplier who previously provided the same or similar goods or services to the buyer as the seller now offers, and
(2) if a service vendor, the name of a firm that would be in a similar payment status as that of the vendor. (For example, to a restaurant with a broken refrigeration unit, the repair firm would
be critical until the repair is made but not after; or a newspaper that published an ad for a restaurant would be important at the time that the ad is placed but not as important thereafter.)
A request for audited financial statements on the firm (or at least financial statements if audited ones are not available)
If this firm is a proprietorship or partnership, an authorization form at the bottom of the credit application must provide the permission to obtain a consumer credit report on either the owner or owners of the firm
If this is a firm that is relatively new (less than one year in business) a personal guarantee may be needed. This must be a separate form from the credit application and should include in its body the permission to obtain consumer credit information on the parties signing it.
If a personal guarantee is obtained, then the home address, phone number, and e-mail address should be obtained on all parties signing the personal guarantee.
A final statement that the signor attests to the truthfulness of the above information
Signatures and titles of those signing the credit application
Tips and Techniques: Four Methods Employed to Determine the Financial Strength of a Firm
Most credit professionals use one or more of the following approaches when analyzing the financial viability of a customer.
1. Common size analysis. Converts numbers from the balance sheet and income statement to percentages of a total (i.e., assets, liabilities and net worth, or net sales), allows companies of different sizes within an industry the ability to compare their results against that of other industry players, and allows a company to compare its percentages for each item against previous years’ results
2. Trend analysis. Compares parts of the Balance Sheet, Income Statement, Statement of Cash Flows, and Ratios from the present year to those of previous years and works best when there are at least three to five years’ worth of data to compare
3. Comparison to industry standards. Comparing the changes in “Key” ratios from each year against industry “Norms” to pinpoint movement toward improvement or decline in a business and to identify “unusual items”
4. Ratio analysis. Standardize financial data using mathematical relationships expressed as percentage or times which can be compared both against industry “Norms” or as part of trend (year-to-year) comparison
Credit Terms
Tips and Techniques: Time-Tested Methods to Prevent Firms from Abusing Cash Discount Terms
Set a definite policy approved and supported by top management as to the limit of what is accepted as the maximum time frame for receipt of payment in which the cash discount will be allowed.
Set a definite policy approved and supported by top management as to a total amount or percentage of sales or receivables that can be accumulated, which will trigger a final warning letter to be sent to the head of the customer’s purchasing department with a copy to the accounts payable manager, notifying them that if repayment of disallowed discounts are not made within 10 days, the customer’s orders or service will be stopped.
If the customer again takes a discount that is disallowed after being forced to repay under threat of credit hold, it will be notified that cash discount terms will no longer be offered to that customer.
An automated dunning letter system will be set up, which notifies the customer every time that it takes a cash discount that is not justified.
A letter of company policy in relation to cash discounts will be sent to the head of the purchasing departments of all of the seller’s customers by the seller’s president, notifying them about benefits of the cash discount program but advising them of the consequences of abusing the privilege of taking a cash discount.
Disallowed cash discounts will not be written off just to keep a customer happy, for it will use this method to increase its profitability at the expense of the seller.
Cash Flow Improvement: Preventing Delinquency before It Can Occur
Tips and Techniques: Questions You Should Ask When Considering Accepting Credit Cards as Payment
Bank Concerns
What banks are being considered for servicing your credit card needs?
What is the discount rate that they will charge and is it a blended rate for MasterCard, Visa, and American Express? For how long is it good?
What type of software package do they use, and is it compatible with your system?
What reports will the bank provide to assist in the confirmation of acceptance of the credit card transaction?
What means are needed by the bank to submit approved credit card transmissions for payment? Can an electronic submission of “payment tickets” be sent to the bank as well, or will paper ticket forms be required?
If the bank that you use is not the credit card bank, how will these submissions for payment be tendered?
If the bank that you use is not the bank that is the accepted provider, how will payments and data be transferred between the two banks and ultimately delivered to you?
What reports are available to confirm payment by the bank into your lockbox?
Can payments be automatically applied via an automated cash application system?
What technical assistance can the bank provide in the setup of the software and use with your system?
What training can the bank provide to those persons involved with the accepting of credit cards?
Internal Concerns
At the time that the order is being taken, what credit card information will need to be inputted into the system? What screens or field blocks will need to be completed in order to finalize the sales order and generate the need for a nightly offline approval request? To reduce input errors, can the system be programmed to confirm certain checks of credit card numbers after a type of card has been chosen as being used for payment (i.e., MasterCard’s always begin with a “5” and have 16 digits; Visa cards always begin with a “4” and have 16 digits; and American Express cards always begin with a “3” and have only 15 numbers.) .
Orders need to be automatically held for one day until the approval is received. Who will release the approved orders? Can your system automatically release these orders from information that it receives from the bank? Once approval codes are downloaded from the bank, can these numbers be automatically added to the forms needing this information before the orders are released and the documents printed (i.e., sales orders, etc.)?
How will the data need to be formatted to transmit to the bank a nightly offline batch request of credit card purchases for approval?
Can your system generate a report each morning from information received from the bank the night before that lists the approved and disapproved credit card transactions?
Who will reconcile the total dollars of credit orders taken daily to the total dollars of credit card orders approved and denied for payment to confirm balance of these numbers? Can this be automated?
If the credit card is not approved, who will follow up the customer to either obtain a correct card number or a different card number or refer the customer to the credit department for submission of required credit information?
If product is not available after the credit card order is approved, who will follow up with the customer as to the status of their order? If the customer wishes the order cancelled, who will reverse the credit card transaction?
What documents will need to reflect the customer’s credit card number, expiration date, name on credit card being used, and the approval number by the bank? What fields are available on the system to accommodate these needs?
Can the customer’s credit card information be retained on the system for future use and reference when the customer places additional orders? (This information should require an additional password for release of it to the user.)
What information should the invoices reflect in connection with payment by credit card (i.e., paid by MasterCard, Visa, American Express, and date paid [Approval date])?
Who will have the ability to accept credit cards for payment (i.e., customer service, credit, both)?
Should the credit cards be used not only for new sales but also as a method to pay past due balances?
Who should be designated as responsible for the security of the overall credit card operation?
Who will have the authority to reverse a credit card transaction? (Note: This should not be the same individual as the person who accepts the cards.)
Who will be doing the cash application of credit card payments if they cannot be automated? What information will be needed by them to minimize the efforts in its application (i.e., some means to identify a payment through possibly a sales order number, invoice number, etc.)?
MasterCard and Visa transactions will be paid at 100 percent of face value in two banking days and the discount charges will be billed monthly. American Express deducts 2.95 percent from each transaction processed and pays the net amount in three banking days. Who will be responsible for the reconciliation of all three types of card billings and the approval and payment for the transactions processed for MasterCard and Visa sales?
Can your system be programmed to automatically allow for the 2.95 percent deduction from each credit card transaction paid by American Express? Can these deductions be accrued in a general ledger account?
Can reports be generated by your system to track customer type information and credit card type usage? Information needed, by customer type, will include the average dollar ticket size, percentage of type of card used, number of transactions by customer type with a total for each type, and total dollars of credit card sales by customer type versus that customer type’s total sales. The reports needed for credit card type usage include total fees paid by each credit card type within a customer type and the percentage, total dollars with average ticket size, and the number of credit card type transactions used by each customer type. These reports should be made to reflect monthly and year to date statistics. See Exhibits 2.1 through 2.6.
Special Note: The titles used on this form are for a company that mainly sells to these three types of buyers but could be altered for use in any type of customer base. (This type of information will be needed by the bank to use in the renegotiation of the discount rate and to track the costs involved with accepting each type of credit card. It will also help to determine if any credit card is being underutilized and acceptance should be discontinued.)
What means will your firm use to notify their customers of their ability to now accept credit cards for payment? Will any special programs be offered to promote their use?
Collection Efforts
Tips and Techniques: Considerations that Must Be Addressed When a Buyer Dictates Payment Terms
What are their annual purchases from your firm (i.e., are they a large customer, in the top five, or simply one of many customers)?
What is the profit margin of the goods or services that you sell to them (substantial versus small)?
What product or service do you provide to this firm (i.e., are your goods or services unique or are you one of many competitors offering this to the marketplace)?
Can you build into your price the costs of carrying this sale for the longer time?
Would a cash discount solve the problem and can it be cost justified?
If there is no way to offset the costs of carrying them, the profit margin is not substantial and they purchase only minimally, can they either be referred to another supplier of your goods or services or simply dropped as a customer?
Tips and Techniques: Steps for Reducing Delinquency
1. Automatic debit of the customer’s bank account as the invoice comes due (not uncommon in many industries [e.g., tobacco and gasoline industries and many others])
2. Request that the customer pay you using an automated clearinghouse (ACH) transfer to your bank account.
3. For those not paying electronically, have a lockbox set up in the best strategic location to minimize float time for receipt of payment. (Special note: Shopping this cost with many banks, depending on your relationship with them, what services they offer, the areas that they cover, and fees that they charge can help to make this a more cost-effective proposition.)
4. Set a general maximum “grace period” deadline for payments to be received (can be from 1 day to as many as 15 days depending on the corporate philosophy, place in the market, profit margin, etc.) before:
A late fee is assessed
Customer is automatically e-mailed by the system a copy of the invoice with proof of delivery along with a request for immediate payment
If your goods or services are in great demand, place the customer on credit hold and notify all internal parties that need to know, as well as e-mail the customer that this has occurred while requesting immediate payment of the past due invoice.
5. Depending on the size of the invoice, a phone call may be worthwhile to determine any problems or their reason for the nonpayment.
Tips and Techniques: Steps for Reduction of Serious Delinquency
1. If there is a contract involved, such as with a manufacturer and a distributor, the possibility of termination of the right to sell your products is a definite leverage tool to resolve the delinquency issue.
2. Some contracts have built into them the right to automatically terminate the agreement if delinquency reaches a certain level. If this is not in place, it should be immediately added!
3. The reduction/elimination of the buyer’s credit limit can also be used as a means to confirm the seriousness of the situation with the customer (this may be part of the system’s capability as programmed by the credit manager and company philosophy).
4. The offering of a promissory note with interest and either additional security and/or personal guarantees by the owners of the firm can help to reduce the debt on a steady monthly basis. All interim sales made during the duration of the note would be made on a cash-on-delivery basis for goods and cash-in-advance for service sales.
For more Information:
Cash Management Tips and Techniques, Corporate Cash Management, How to Manage Profit and Cash Flow
Credit Review and Decision
New Customer Application—What Information Should Be Requested?
Tips and Techniques: What a Very Detailed Application Should Contain
Customer’s full legal name (a legal name, not a DBA [doing business as])
Customer’s physical address (the address where billing information is sent)
Customer’s phone/fax numbers and e-mail address as well as Web site address
What type of business it is:
Proprietorship
Partnership
Limited liability partnership
Limited liability company
Corporation (state whether a “C” corporation or a Subchapter “S” corporation) (the date and state of incorporation and whether it is a private or public firm)
Joint venture
Nonprofit corporation
Government agency (town, city, county, state, or federal)
Phone/fax number and e-mail address of the accounts payable area that will have responsibility for paying this account
If this is a proprietorship or partnership, the name(s), address(s) and home phone number(s) and e-mail address(s) of the owner(s)
Corporate parent’s name, address, phone/fax numbers and e-mail address
Whether it is a division, subsidiary, or affiliate of the parent corporation
Date firm started
Type of firm that it is:
Manufacturer
Distributor
Retailer
Service firm
Other
Credit limit requested
Dun & Bradstreet Dun’s # (identification number for companies)
Bank reference information, including:
Bank name
Bank address where account is
Bank account number(s)
Type of account(s) with the bank
What type(s) of collateral (if any) the bank has a lien on
Whether a personal guarantee has been given to the bank by the officer(s) of the firm
Bank officer’s name in charge of its account
Bank’s phone/fax numbers as well as e-mail address
Signed permission form to provide to bank to obtain a reference
Trade references information, including (minimum 3, maximum 4):
Trade reference company name
Trade reference company’s address where account is
Account number(s) with the trade reference company
Type of account(s) with the trade reference company
What type(s) of collateral (if any) the trade reference company has a lien on
Whether a personal guarantee has been given to the trade reference company by the officer(s) of the firm
Credit manager’s name in charge of its account
Trade reference company’s phone/fax numbers as well as e-mail address
Signed permission form to provide to trade reference company to obtain a reference
The credit application form should request the name of at least two references that would be similar in nature to the credit extender, such as
(1) the supplier who previously provided the same or similar goods or services to the buyer as the seller now offers, and
(2) if a service vendor, the name of a firm that would be in a similar payment status as that of the vendor. (For example, to a restaurant with a broken refrigeration unit, the repair firm would
be critical until the repair is made but not after; or a newspaper that published an ad for a restaurant would be important at the time that the ad is placed but not as important thereafter.)
A request for audited financial statements on the firm (or at least financial statements if audited ones are not available)
If this firm is a proprietorship or partnership, an authorization form at the bottom of the credit application must provide the permission to obtain a consumer credit report on either the owner or owners of the firm
If this is a firm that is relatively new (less than one year in business) a personal guarantee may be needed. This must be a separate form from the credit application and should include in its body the permission to obtain consumer credit information on the parties signing it.
If a personal guarantee is obtained, then the home address, phone number, and e-mail address should be obtained on all parties signing the personal guarantee.
A final statement that the signor attests to the truthfulness of the above information
Signatures and titles of those signing the credit application
Tips and Techniques: Four Methods Employed to Determine the Financial Strength of a Firm
Most credit professionals use one or more of the following approaches when analyzing the financial viability of a customer.
1. Common size analysis. Converts numbers from the balance sheet and income statement to percentages of a total (i.e., assets, liabilities and net worth, or net sales), allows companies of different sizes within an industry the ability to compare their results against that of other industry players, and allows a company to compare its percentages for each item against previous years’ results
2. Trend analysis. Compares parts of the Balance Sheet, Income Statement, Statement of Cash Flows, and Ratios from the present year to those of previous years and works best when there are at least three to five years’ worth of data to compare
3. Comparison to industry standards. Comparing the changes in “Key” ratios from each year against industry “Norms” to pinpoint movement toward improvement or decline in a business and to identify “unusual items”
4. Ratio analysis. Standardize financial data using mathematical relationships expressed as percentage or times which can be compared both against industry “Norms” or as part of trend (year-to-year) comparison
Credit Terms
Tips and Techniques: Time-Tested Methods to Prevent Firms from Abusing Cash Discount Terms
Set a definite policy approved and supported by top management as to the limit of what is accepted as the maximum time frame for receipt of payment in which the cash discount will be allowed.
Set a definite policy approved and supported by top management as to a total amount or percentage of sales or receivables that can be accumulated, which will trigger a final warning letter to be sent to the head of the customer’s purchasing department with a copy to the accounts payable manager, notifying them that if repayment of disallowed discounts are not made within 10 days, the customer’s orders or service will be stopped.
If the customer again takes a discount that is disallowed after being forced to repay under threat of credit hold, it will be notified that cash discount terms will no longer be offered to that customer.
An automated dunning letter system will be set up, which notifies the customer every time that it takes a cash discount that is not justified.
A letter of company policy in relation to cash discounts will be sent to the head of the purchasing departments of all of the seller’s customers by the seller’s president, notifying them about benefits of the cash discount program but advising them of the consequences of abusing the privilege of taking a cash discount.
Disallowed cash discounts will not be written off just to keep a customer happy, for it will use this method to increase its profitability at the expense of the seller.
Cash Flow Improvement: Preventing Delinquency before It Can Occur
Tips and Techniques: Questions You Should Ask When Considering Accepting Credit Cards as Payment
Bank Concerns
What banks are being considered for servicing your credit card needs?
What is the discount rate that they will charge and is it a blended rate for MasterCard, Visa, and American Express? For how long is it good?
What type of software package do they use, and is it compatible with your system?
What reports will the bank provide to assist in the confirmation of acceptance of the credit card transaction?
What means are needed by the bank to submit approved credit card transmissions for payment? Can an electronic submission of “payment tickets” be sent to the bank as well, or will paper ticket forms be required?
If the bank that you use is not the credit card bank, how will these submissions for payment be tendered?
If the bank that you use is not the bank that is the accepted provider, how will payments and data be transferred between the two banks and ultimately delivered to you?
What reports are available to confirm payment by the bank into your lockbox?
Can payments be automatically applied via an automated cash application system?
What technical assistance can the bank provide in the setup of the software and use with your system?
What training can the bank provide to those persons involved with the accepting of credit cards?
Internal Concerns
At the time that the order is being taken, what credit card information will need to be inputted into the system? What screens or field blocks will need to be completed in order to finalize the sales order and generate the need for a nightly offline approval request? To reduce input errors, can the system be programmed to confirm certain checks of credit card numbers after a type of card has been chosen as being used for payment (i.e., MasterCard’s always begin with a “5” and have 16 digits; Visa cards always begin with a “4” and have 16 digits; and American Express cards always begin with a “3” and have only 15 numbers.) .
Orders need to be automatically held for one day until the approval is received. Who will release the approved orders? Can your system automatically release these orders from information that it receives from the bank? Once approval codes are downloaded from the bank, can these numbers be automatically added to the forms needing this information before the orders are released and the documents printed (i.e., sales orders, etc.)?
How will the data need to be formatted to transmit to the bank a nightly offline batch request of credit card purchases for approval?
Can your system generate a report each morning from information received from the bank the night before that lists the approved and disapproved credit card transactions?
Who will reconcile the total dollars of credit orders taken daily to the total dollars of credit card orders approved and denied for payment to confirm balance of these numbers? Can this be automated?
If the credit card is not approved, who will follow up the customer to either obtain a correct card number or a different card number or refer the customer to the credit department for submission of required credit information?
If product is not available after the credit card order is approved, who will follow up with the customer as to the status of their order? If the customer wishes the order cancelled, who will reverse the credit card transaction?
What documents will need to reflect the customer’s credit card number, expiration date, name on credit card being used, and the approval number by the bank? What fields are available on the system to accommodate these needs?
Can the customer’s credit card information be retained on the system for future use and reference when the customer places additional orders? (This information should require an additional password for release of it to the user.)
What information should the invoices reflect in connection with payment by credit card (i.e., paid by MasterCard, Visa, American Express, and date paid [Approval date])?
Who will have the ability to accept credit cards for payment (i.e., customer service, credit, both)?
Should the credit cards be used not only for new sales but also as a method to pay past due balances?
Who should be designated as responsible for the security of the overall credit card operation?
Who will have the authority to reverse a credit card transaction? (Note: This should not be the same individual as the person who accepts the cards.)
Who will be doing the cash application of credit card payments if they cannot be automated? What information will be needed by them to minimize the efforts in its application (i.e., some means to identify a payment through possibly a sales order number, invoice number, etc.)?
MasterCard and Visa transactions will be paid at 100 percent of face value in two banking days and the discount charges will be billed monthly. American Express deducts 2.95 percent from each transaction processed and pays the net amount in three banking days. Who will be responsible for the reconciliation of all three types of card billings and the approval and payment for the transactions processed for MasterCard and Visa sales?
Can your system be programmed to automatically allow for the 2.95 percent deduction from each credit card transaction paid by American Express? Can these deductions be accrued in a general ledger account?
Can reports be generated by your system to track customer type information and credit card type usage? Information needed, by customer type, will include the average dollar ticket size, percentage of type of card used, number of transactions by customer type with a total for each type, and total dollars of credit card sales by customer type versus that customer type’s total sales. The reports needed for credit card type usage include total fees paid by each credit card type within a customer type and the percentage, total dollars with average ticket size, and the number of credit card type transactions used by each customer type. These reports should be made to reflect monthly and year to date statistics. See Exhibits 2.1 through 2.6.
Special Note: The titles used on this form are for a company that mainly sells to these three types of buyers but could be altered for use in any type of customer base. (This type of information will be needed by the bank to use in the renegotiation of the discount rate and to track the costs involved with accepting each type of credit card. It will also help to determine if any credit card is being underutilized and acceptance should be discontinued.)
What means will your firm use to notify their customers of their ability to now accept credit cards for payment? Will any special programs be offered to promote their use?
Collection Efforts
Tips and Techniques: Considerations that Must Be Addressed When a Buyer Dictates Payment Terms
What are their annual purchases from your firm (i.e., are they a large customer, in the top five, or simply one of many customers)?
What is the profit margin of the goods or services that you sell to them (substantial versus small)?
What product or service do you provide to this firm (i.e., are your goods or services unique or are you one of many competitors offering this to the marketplace)?
Can you build into your price the costs of carrying this sale for the longer time?
Would a cash discount solve the problem and can it be cost justified?
If there is no way to offset the costs of carrying them, the profit margin is not substantial and they purchase only minimally, can they either be referred to another supplier of your goods or services or simply dropped as a customer?
Tips and Techniques: Steps for Reducing Delinquency
1. Automatic debit of the customer’s bank account as the invoice comes due (not uncommon in many industries [e.g., tobacco and gasoline industries and many others])
2. Request that the customer pay you using an automated clearinghouse (ACH) transfer to your bank account.
3. For those not paying electronically, have a lockbox set up in the best strategic location to minimize float time for receipt of payment. (Special note: Shopping this cost with many banks, depending on your relationship with them, what services they offer, the areas that they cover, and fees that they charge can help to make this a more cost-effective proposition.)
4. Set a general maximum “grace period” deadline for payments to be received (can be from 1 day to as many as 15 days depending on the corporate philosophy, place in the market, profit margin, etc.) before:
A late fee is assessed
Customer is automatically e-mailed by the system a copy of the invoice with proof of delivery along with a request for immediate payment
If your goods or services are in great demand, place the customer on credit hold and notify all internal parties that need to know, as well as e-mail the customer that this has occurred while requesting immediate payment of the past due invoice.
5. Depending on the size of the invoice, a phone call may be worthwhile to determine any problems or their reason for the nonpayment.
Tips and Techniques: Steps for Reduction of Serious Delinquency
1. If there is a contract involved, such as with a manufacturer and a distributor, the possibility of termination of the right to sell your products is a definite leverage tool to resolve the delinquency issue.
2. Some contracts have built into them the right to automatically terminate the agreement if delinquency reaches a certain level. If this is not in place, it should be immediately added!
3. The reduction/elimination of the buyer’s credit limit can also be used as a means to confirm the seriousness of the situation with the customer (this may be part of the system’s capability as programmed by the credit manager and company philosophy).
4. The offering of a promissory note with interest and either additional security and/or personal guarantees by the owners of the firm can help to reduce the debt on a steady monthly basis. All interim sales made during the duration of the note would be made on a cash-on-delivery basis for goods and cash-in-advance for service sales.
For more Information:
Cash Management Tips and Techniques, Corporate Cash Management, How to Manage Profit and Cash Flow
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