Critical Business Functions:
Misunderstood, Underutilized, and Undervalued
Part One: Credit and A/R Management

Featured Authors -

1. Introduction
2. Credit and A/R Management as a Sales Function
3. Using Credit as a Sales Support Tool
4. Introduction
5. Monitoring and Improvement
6. Replacing Aging Reports


"In every age and time there is a turning point, a new way of seeing and asserting the coherence of the world."

Jacob Bronowski, The Ascent of Man

What is the best value proposition for the credit function in business? If we consider the most common key performance indicators (KPI)—Days Sales Outstanding (DSO) and percent of bad debt—it would seem that the major role of credit is risk management. However these measurements and the thinking behind them are flawed, out-of-date, and potentially detrimental in today's business world.

Accounts receivable (A/R) is one of the largest and most liquid of corporate assets, credit and A/R management may be the most misunderstood, underutilized, and undervalued business process. For example, the potential cash flow that can be generated when A/R is brought under control is huge. A very modest three-day reduction in A/R for a typical $20 million company can be in excess of $200,000!

Yet, most often credit and A/R management are thought to be part of accounting—a cost center and a necessary evil. However, because of the potential of credit and A/R management, they should be an integral part of the sales process, by helping establish a framework for a long term and mutually beneficial relationship between buyer and seller. They can play a critical role in the prospect-to-cash cycle.

Credit and A/R Management as a Sales Function

Credit and A/R management is a sales enhancement function whose true potential has yet to be realized by most businesses. Credit is a lubricant of commerce and allows the expanded movement of products and services. Yet, improperly applied, credit policies can hinder free flowing commerce.

There was a time not so very long ago when there were valid reasons for viewing extended credit as a privilege, as a favor to some and not for others. Following World War II, pent up demand, commercial shortages, and earnings from work in the war effort precipitated unprecedented growth. Outside of North America, much of the industrial world had been badly damaged or destroyed by the war and had to be rebuilt. The lack of readily available finances for reconstruction in Europe created even more demand for credit.

Later, the 1950s became a time of limited competition; there were no big box stores, cyber competition or aggressive foreign competitors. Credit was granted only as a last resort, and credit terms were tightly controlled and designed to limit a company's risk. If customers failed to pay on time, they were cut off from further credit and potentially "blackballed" by others.

The natural outgrowth of this economic climate was the view that credit management was aligned with risk management and the KPIs were DSO and percent of bad debt. This view was therefore appropriate for the times.

However, the current economic climate is radically different from the post-WW2 era. Rather than shortages, now there are more goods and services available then ever before in human history with more on the way. Quality in products and services is a given expectation and for businesses to be competitive they must also have quality business processes.

Yet, today many businesses still cling to the old credit philosophy of the past and track DSO and percent of bad debt. But in doing so, they are missing an opportunity to increase sales, improve cash flow, control losses, elevate customer service levels and customer retention, and decrease their cost of doing business—all of which contribute to profit enhancement.

The notion of risk management that ruled in the 1950s was applicable for that time, but this is 2005. We must rethink the role of credit.


Using Credit as a Sales Support Tool

Credit is extended when a product or service is sold on the basis of payment at a later date. The extension of credit creates additional administrative costs such as information gathering, credit checking, account establishment, billing ,and past due A/R management. There's also the cost of carrying A/R, the time value of money. Finally the customer may fail to pay and with that comes the cost of bad debt write-offs.

Some people will tell you that costs are incurred because customers require time to ensure they got what they ordered and more time to process the invoice. Others will tell you that customers need time to add value to the products or services they are buying, and to make sales to their own customers. Finally, some will tell you that they must incur the costs of credit because it's the customary way of selling in their industry, and that if they don't extend credit, their competitors will.

However, the only reason a business should extend credit is to generate a sale that would otherwise be lost—not just any sale but profitable sale. Any fool can make sales and lose money doing so.

Thus the purpose of credit is sales support. It is not an accounting function.


Major Components

In most cases the credit-to-cash function can be broken down into four major components:

  • Credit/sales approval
  • Billing
  • A/R management
  • Monitoring and improvement

Each component must have a goal which compliments the purpose of the credit-to-cash function itself. Unfortunately most companies view the first three items as separate and distinct business functions while the fourth component is ignored altogether. If the credit-to-cash cycle is not viewed as a single process with individual components that contribute, in their own unique way, to the success of the whole, this critical cycle will consistently fail to achieve its full potential.


Credit/Sales Approval

Despite the investment and the goal of extending credit, the credit approval process has, at times, been described as finding ways to say “no” and the credit department has been referred to as the “sales avoidance department”. Moreover, considering that credit people are being told (via performance measurements) that risk avoidance is the goal, it’s surprising that any customer gets approved for credit.

Avoiding the Wrong Message

A substantial investment is made in getting customers to the point where they want to buy. It's such a waste to then look for reasons to reject the sale and to alienate the customer to the point where they may reject you in the future.

There are three key factors that must be considered during the credit approval process. They need to be considered not just at the original sale but on all credit sales

Customer Profile: Who are your customers and, just as important, how do they do business?

Past Performance: Has the customer ever paid anyone in the past?If they haven't what makes you think you're going to be the first? As the late former US president, Ronald Regan, said "Trust but verify."

Product Value at Time of Sale: If you are operating below capacity, the only expenses that matter are variable costs. This is true for both a service as well as product-oriented environment. The actual profit margin for these incremental sales is therefore higher, sometimes substantially higher. In order to fill this excess capacity, you can adopt very aggressive pricing models or relaxed credit terms. The write-off rate may be higher, but the incremental profit more than makes up for the added risk.

Sending the Right Message

The credit approval process should be to maximize sales opportunities wherever possible while minimizing risks. Working to find ways of saying “yes” to every possible sale while remaining confident of payment better complies with the sales support mission.

Most people treat credit approval as a fixed point in time with a fixed set of operating characteristics. Once a prospect has overcome all of the credit approval hurdles that inhibit the desire to place an order, the prospect is then assigned a credit line. However, this, in most instances, acts more as a deterrent to new business from the prospect than as a protection against increased risk.

For example, if a customer likes your products or services and wants to order more than either party had originally anticipated, credit line place a temporary cap on the ability to expand the relationship and do more business with you. What’s wrong with this picture? Good customers with whom you want to do more business should not be impeded in any way and yet the desire to “protect” revenue has done just that. Good customers should be allowed to place their orders easily and permit the sales-to-cash cycle flow evenly into the billing process.



Credit/sales approval supports the sales process, but that’s just the first step in the sales-to-cash cycle. Profitable sales cannot be achieved unless payment is received. A funny thing about selling on credit is that when you don't send an invoice (or send one that makes no sense), most customers won't send you money. The goal of billing is to facilitate payment, and to do so the billing must be timely, accurate, complete (according to the customer) and understandable. Finally, invoices and the original credit terms should reflect a late charge for late payments. If there is no late charge, there is no set term for payment, and no motivation on the part of a customer to pay on time.


A/R Management

At this point, the sale has been motivated by enlightened credit management; an order has been received; goods shipped or services provided; and an accurate and timely invoice placed in the customer’s hands. A profitable sale is almost within grasp and will be achieved once this invoice has been paid. The gross margin, as calculated from the invoice, is now at its highest point, but will deteriorate slowly as time passes and the customer fails to pay on time. However, what cannot be stressed enough is that A/R Management is not "collections", the enforcement of payment. Collections is what collection agencies and attorneys do. They deal with "debtors", not customers.

A/R Management is "the completion of the sale". The primary goal is to keep customers current and buying, and in that process is crucial to achieve one of the most important underlying goals: the stimulation of repeat sales. The last thing smart companies want to do is create an impediment to lucrative, repeat business.

The secondary goal of A/R Management is the early identification and control of the small percent of credit customers who represent a potential for loss. Every past-due customer will fall into one of three categories.

Type 1: Slow Pays. Some customers practice tight cash management and deliberately pay late. Other customers may be disorganized, lazy or indifferent to paying on time. These are customers whose business is desired and profitable.

Type 2: Problem Accounts. The problem can be something going wrong or the customer not having the ability to pay. System problems, or things going wrong often make up the largest percent of all past dues. Financial problems are either short term (temporary) or long term (serious). We want to work with the financial temporaries and encourage their continued business and we want to cut off further credit to the financial serious who represent a 90 percent-plus risk of failure.

Type 3: Avoiders. This type of customer is constantly trying to beat you out of your money. It is also the smallest percentage of all past-dues. Rather than wasting time (your most precious resource) fighting for payment, cut off credit and refer this account to a “real” collector; an enforcer of payment.

Everything else being equal, people buy from someone they like. The exact same rule applies to payment. Remember: people pay those they like … first.


About the Authors

Charles Chewning, Jr. is president of Solutions, a Richmond, Virginia-based (US) consulting firm specializing in accounting software selection. He is considered a leading software selection expert. Chewning has written a number of accounting software reviews and is a frequent speaker on the subject of accounting software selection as well as sales and marketing. He is the publisher of The Accounting Library (

He can be reached at

Abe WalkingBear Sanchez is the president and founder of A/R management Group ( and developer of the copyrighted Profit System of B2B Credit Management. An international business speaker, WalkingBear has spoken to over 600 CEO and top managers groups worldwide in the last ten years.

WalkingBear can be reached at



In the past, the idea of credit clung to the philosophy of risk management, measured by Days Sales Outstanding (DSO) and percent of bad debt. However, credit and effectively managed accounts receivable (A/R), when used as a sales tool can generate huge returns by motivating sales. By looking at the major components of credit-to-cash function, and giving each component a goal, companies can increase sales and improve cash flow while controlling losses and costs. Using updated reporting techniques, understanding the competitive landscape, and using appropriate A/R management software will help companies realize a notable return.


Monitoring and Improvement

The circle of credit and A/R management is closed when companies continuously monitor and improve each of the key steps in the process. Goals need to be established. Actual results need to be measured and compared against these goals. Opportunities for improvement need to be identified and changes made. Finally, new goals are established and information gathered to monitor the revised processes.

Please keep in mind that this is both an internal and external process. The internal component is an analysis of the efficiency and effectiveness of various credit and A/R management business processes themselves as well as individual employees (or work groups). Efficiency is tied to the cost of a business process (or one of its components), while effectiveness is tied to whether the specified goals are being achieved. You could spend great quantities of cash making a business process work, but that would not be cost effective. Conversely you could reduce costs but not achieve the required goals. Somewhere between these two extremes is the best suited path and that path will depend on your industry and the way you have decided to run your business.

What then needs to be measured and why? The following list is certainly not all inclusive but is intended to help establish a framework to measure efficiency and effectiveness.

Payment Terms: Cash flow can be impacted if payment terms are too liberal. While more lenient payment terms may be a reflection of competitive realities, they may also be used as a quick fix to gain business.

Invoicing Delays: If there is a delay between the time an order is shipped or a service provided and the invoice date, this may be an opportunity for improvement. Users should track both the average delay (general improvement) as well as investigate billing delays for specific invoices that exceed a specified limit (specific improvement).

Procedural Errors: The failure to meet a customer’s business process requirements (purchase order number, invoice formats, pricing, even number of invoice copies) will lead to payment delays. These procedural errors need to be segregated by type, tracked, and continuously improved.

Service Disputes: If a customer does not pay on time due to an identifiable dispute or problem (goods or services are not provided on time, poor quality, or any other reason that can be tracked), cash flow will be negatively impacted. These specific problems need to be resolved as quickly as possible (another measurement standard) and they need to be tracked over time to determine if general improvement is being achieved.

Average Days Late: Average days late (ADL) measures a customer’s payment history as it relates to the payment terms offered for each invoice. If a customer’s ADL is increasing or is higher than average, this should be a trigger to contact the customer, not about a specific invoice, but their payment history in general. ADL may also indicate that a specific A/R representative is not quite as effective as they could be (when compared against other A/R reps). Finally, payment history should be one of the factors sales people consider when discussing future pricing with customers.

In each of the examples above, progress will be made only if identified problems are addressed immediately. This isn’t the only solution though. Statistical and historical information need to be collected and tracked. For example, when an invoice becomes overdue, A/R reps need to determine both the classification of the problem (maybe this time it is a procedural error) as well as its specific subcategory (failure to indicate customer purchase order). By tracking the underlying causes of payment delay management can determine where they need to focus its attention and whether these problems are being improved over time.


Replacing Aging Reports

In the past and to some extent even today the only A/R management tool available was an aging report. While the aging report does list overdue invoices, the contact and follow up process is entirely manual. This may be acceptable for companies with a limited customer list or limited invoice activity, but it is certainly inefficient and ineffective for everyone else.

Improving the invoice-to-payment process must start with the assumption that the aging report as the primary management tool must be replaced with a software-supported process. Specifically the process should mimic the functions found in a contact manager.

While there is no doubt that bringing receivables under control will initially require some effort and expense (mostly time), the goal is getting customers to the point where they are thinking about you when selecting invoices for payment. If you can reach that point with most customers, the future time and cost required to keep receivables in line will be more reasonable.

Ultimately, your approach has to be positive, not negative. “He who screams loudest gets paid first” does not work in the long run. Threatening customers does not contribute to repeat (highly profitable) business. You want them to give you payment priority because they want to, not because they have to.


Competitive Landscape

Although the return on investment (ROI) for A/R management software is extremely high (500 percent and more), very few middle market accounting software vendors offer this application either directly or as a third-party product. Navision (third-party), Great Plains (direct), SouthWare (direct), Solomon (third-party), and Syspro (direct) however, do offer this functionality. Navision’s application is by far the most comprehensive. There may be other third-party products that integrate with middle market accounting products, so the best course of action is to ask your vendor or reseller.


A/R Management Software

If the goals of A/R management are best served by a supporting software application, what features are most important? It will not be possible to describe every function or associated business process, but we will try to highlight the most important aspects.

  • Responsibility: Specific collections responsibility must be assigned to people within the organization. No business process will achieve optimum performance levels unless people are actually assigned responsibility and their performance measured. In some cases responsibility can be shared between two or more people in a work group setting. If required, individual customers should be assigned to specific A/R management representatives. This fosters a positive relationship by which subtle pressure can be applied just as it is in the sales process.

  • Sales Reps: In some cases sales representatives can be brought into the process with full contact responsibility or with read-only access (meaning they can view a customer’s payment history, but cannot actually record collections calls).

  • Hierarchy: Some form of hierarchy should be created to facilitate management oversight as well as the transfer of responsibility. A prime example here would be the transfer of responsibility for an invoice from a collections rep to the CFO or other senior manager if legal action is the next logical step.

  • Trigger Points: While dates drive a typical contact manager and certainly dates will drive an A/R Management application once first contact has been made, the trigger that will drive the first contact with a customer (concerning a newly identified overdue invoice) will be an event. Smaller companies could get by with a very limited number of event types, while larger organizations may want to take full advantage of the fact that any one of several event types could drive the first contact. In most cases the trigger point should be based on due date + |x| days. For example, an invoice will be passed through to the A/R management application five days after the due date. Users should also have the ability to define customer-specific trigger points.

  • High Value Invoices: A separate trigger point could be assigned to invoices that exceed a certain dollar value. This recognizes the fact that high-value invoices should receive higher priority.

  • Statements and Dunning Notices: We have assumed to this point that the driving force behind the A/R management system is personal, repetitious contact with customers. What about statements and dunning notices (letter and e-mail)? This is certainly the least costly alternative, particularly if e-mail is utilized as the delivery vehicle. The problem is that statements and dunning notices do not work in all instances.

    If an invoice is incorrect or lost in the mail, good customers will respond to a statement or dunning notice. Other customers will do nothing simply because it’s not their problem. Some customers are “too busy” to take notice. This is particularly true for companies in which the invoice processing function is not efficiently organized. Customers that cannot pay on time or elect not to pay on time as a matter of policy will ignore any form of faceless communication.

    The conclusion that we can draw here is that statements and dunning notices will work under a limited set of circumstances. The most significant drawback is that when this alternative does not work (and that could be most of the time) it delays payment even further. If a customer responds to dunning notices, then it makes economic sense to utilize that as the first contact. If a customer does not react to dunning notices, then the first contact should be personal.

  • Call List: Each person responsible for collections will open the equivalent of a call list just like they would in any contact manager. All newly overdue invoices would be assigned the current date. All other invoices would be sorted by next contact date, again just like a contact manager. Although calls should be made based on next contact date, users should have the flexibility to sort the call list by customer, invoice amount, or any other field associated with the call list.

  • Contact Manager Screen: Once an invoice is selected, the system will display the contact screen and this is where it becomes necessary to have a specialized application. Users should be able to access, via smart buttons and lists every piece of information that will facilitate the payment of this invoice. The user does not have to specify customer ID, invoice number, etc. Once a call has been completed, contact notes recorded, and promised payment date solicited (this is a critical step), the user will record the next contact date (usually a few days after the promised payment date). Hopefully the initial contact will encourage the customer to settle the account by the promised payment date, but if required, users should be able to record an unlimited number of contacts, share this file with other people (even if that is just to cover vacation time), reprint invoices and statements, access e-mail from within the application, and even pass responsibility to another person.

As you can see, many of these functions are identical to those available in a contact manager. However, you can also see that users need to access multiple sources of information and multiple functions that are very specific to the collections process.

Systematic and repetitious contact over time helps the customer realize that you will not let them extend payment. They, in turn, will extend higher payment priority (pay you more rapidly) and that is the primary goal. The customer-specific and invoice-specific information and functions make the process more efficient. Both goals must be achieved.



Accounts receivable can represent the single most valuable liquid asset any company possesses. A modest reduction in A/R can generate a huge one-time cash flow and yet many companies and certainly many accounting software vendors do not seem to understand the potential business benefits of credit and A/R management.

We have to be careful what we ask for. Keep using DSO and percent bad debt to measure the performance of your credit function and what you will get is risk management. Tell your people that they are "collectors" and you shouldn't be surprised if they go out and get a tattoo or have a body part pierced and come back with an attitude.

On the other hand embrace a credit management philosophy that seeks profitability, that defines credit as a sales support function and you can expect more new sale, more repeat sales, higher customer service levels, improved customer retention, and by tracking the source of type 2 systems problems, where customers have either short term or long term monetary problems, constant improvement in your business practices.

Rather than assuming your current A/R management processes are adequate, run the numbers. Examine your approach. If your credit policies and practices are oriented toward risk aversion and are also negatively charged when dealing with customers, consider a more positive approach that encourages customers to improve their payment history.

If your A/R balance is on average ten or more days above your typical payment terms, then you need to investigate some form of software-assisted A/R management process. If your business management system does not provide such an application either directly or as a third party product, investigate the ROI for creating one. Your vendor or reseller may even be willing to partner with you, reselling the application to other users.

The key to an effective credit and A/R management process is treating it as if it were an integral part of customer relationship management (CRM) which in fact is precisely what it is. The people who control payment processing are just as much customers as those people who make the initial purchase decision, and the last thing you want to do is give your customer a reason not to buy (or in this case not to pay).


About the Authors

Charles Chewning, Jr. is president of Solutions, a Richmond, Virginia-based (US) consulting firm specializing in accounting software selection. He is considered a leading software selection expert. Chewning has written a number of accounting software reviews and is a frequent speaker on the subject of accounting software selection as well as sales and marketing. He is the publisher of The Accounting Library (

He can be reached at

Abe WalkingBear Sanchez is the president and founder of A/R management Group ( and developer of the copyrighted Profit System of B2B Credit Management. An international business speaker, WalkingBear has spoken to over 600 CEO and top managers groups worldwide in the last ten years.

WalkingBear can be reached at