Managing Accounts Receivable in the Red Zone

By Dorman Wood, CEW, CCE

The first half of the 2009 professional football season has been completed and many fans are pleased with the performance of their favorite team or teams, while others are sadly disappointed. Every football fan has heard broadcast analysts discuss (sometimes in excruciating detail) game management in the red zone-the area from the twenty yard line to the goal line. Game management in the red zone applies to teams on offense and defense. Coaches and players alike, understand that game management in the red zone is a "make it or break it" time for a team. Especially in the fourth quarter.

Game management in the red zone applies equally whether a team is on offense or defense. Factors that come into play for the team on offense include clock management, proper play calling, right personnel for the play called and proper execution of the play called by the players. The desired results of course is a touch down, or at the very least a field goal. The team on defense is tasked with utilizing the proper personnel (generally described as the "defensive package") to negate the efforts of the team on offense. For the team on defense, the desired result is holding the offense to no score, or at the very least, a field goal.

With the above information in mind, let's apply the same principles of game management in the red zone to managing accounts receivable. Generally, the accounts receivable "red zone" would be considered customer accounts with balances past due (unpaid beyond terms) sixty (60) days or more. See example below:

Accounts Receivable Aging

Applying the basic principles of "game management" in the red zone utilized in professional football, let's see
how they might be used in managing your accounts receivable.

First, let's identify the "teams" in this scenario: the creditor's credit and collection personnel shall be designated
as the "offense," while the debtor's accounts payable personnel shall be designated as the "defense."

OFFENSE: Identifying credit and collection department personnel in football terms, the following "team" assignments might apply:

Offensive line - collectors, doing their best to collect a/r within terms of sale.

Running backs - collection supervisors or group leaders executing "plays" (collections); overcome delaying tactics by 'defense;'

Wide receivers/ends - credit reps/analysts running "pass plays" (approving credit sales) or blocking sales to past due customers or rejecting new credit applications from prospective customers not meeting company requirements.

Quarterback - Corporate or senior credit manager executes "game plan" by overseeing his or her "offensive team" through application of expertise 'field generalship.'

Offensive Coordinator/Coach - VP Finance, Controller or other senior finance title has ultimate responsibility for execution of the "game plan" through team members.

OFFENSIVE GAME PLAN: A company's Credit & Collection Policy and Procedures could be considered as the basis for its offensive "game plan." A successful game plan would have to consider numerous factors, including but not limited to the following:

• Overall company sales and profit goals
  
  
• Credit and collection department goals for managing accounts receivable assets; i.e. monthly collections, a/r aging percentage goals (percentages of aging buckets), and bad debt loss ratio, sales and billing processes to name a few.
  
  
• Personnel expertise and experience levels
  
  
• Competition - market share, product reliability, customer service levels.
  

Seasoned credit professionals understand the dynamics of collections.: the older the invoice, the less likely it is to be paid. Historically, the likely hood of payment on an invoice is as follows: 90% within the first 60 days; 50% over 90 days; 20% over 180 days and 0% over one year.

DEFENSE: Identifying the debtor's personnel in football terms, the following "team" assignments might apply:

Defensive line - Accounts payable personnel doing their best to pay vendors as slowly as possible.

Linebackers - Accounts payable supervisor or lead person "backing up" A/P personnel in dealing with vendors seeking payment.

Cornerback - Accounts payable manager or possibly company controller who is responsible for releasing payments to vendors.

Safety - As the name implies, this person may be the last resort in support of the linebackers and cornerbacks in dealing with vendors. Position title may be corporate controller, finance manager or vice president of finance.

DEFENSIVE GAME PLAN: Simply stated, a debtor's defensive game plan may be to delay payment to vendors as long as possible beyond terms of sale. Historically, debtor companies have used their vendors as a source of operating capital, rather than bank financing. This practice is even more evident in today's economy... Some of the
methods used by debtors to delay payment may include, but not be limited to the following:

• Adopt an arbitrary policy of paying 30-45 days beyond invoice terms.
  
  
• Playing vendors against one another. If another vendor has a similar product, debtor may tell one thatthey will buy from vendor's competitor if they seel to them.
  
  
• Create a delay in payment by questioning various, or all items on an invoice; i.e., pricing, quantity shipped, ,v quantity received, delivery charges, or taxes, to name a few.
  
  
• Send payments to a vendor's remote location, instead of the remittance address on their invoices; make payments by check vs. wire transfer required by vendor.
  
  
• Increase number of chargebacks on invoices or short payments, which causes delays in payments until issues are resolved.
  
  

When managing their accounts receivable in the Red Zone, credit managers need to bring their "A" game. Successfully executing your game plan in the Red Zone is not amatures!

Editor's Note: The purpose of this article is not to demean or ridicule anyone, whether in the business or sports field.It is intended as a different approach to viewing the business relationship between vendors and their customers. Apologies to readers who may not be familiar with football terminology or care about the game.