More on delinquency levels in a collections process of Accounts Receivable – discussion on a reader’s feedback
Last post we shared some factors instrumental in defining delinquency levels:
One of our readers Ad Wijten remarked:
“To my mind the approach of receivables is taken from the wrong angle. The decision to grant a credit-term is purely a financing decision. Companies are in the business to deliver products and services and not to finance the supply chain. This is where banks (should) have a role. We need to re-enforce the supply chain by optimizing the funding at the place where overall costs are lowest. It does not make sense for a AAA-rated company to push a long term on their suppliers with a lower rating. This will only result in additional costs in the supply chain. With this approach all sub-optimisation efforts in Accounts Receivables can be eliminated. Receivables can then focus on solving customer complaints and risk management.”
See the comment at:
Blog Author’s comment:
Surely, a long term credit is a finance decision. We do not disagree. But in our experience a little extra credit period pushed by a customer often helps him (not our client). I have seen clients use payable with a longer credit period to manage their cash flows and use these for inducting some working capital.
But then, this cannot be taken as a predefined thumb rule. Each organization will need to strike a balance on how they wish to approach this.
A new approach:
As our reader remarked, banks have an important role to play. Some of my clients (on our suggestion) tied up with their bankers, where the vendors were paid through a credit card like instrument, for a very small commission, and our client paid the bank after 45 days. Our client increased his early payment discounts. Some of their vendors actually debited the bank commission back to our client, which still made the whole transaction worthwhile.
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