How to Achieve and Maintain an Excellent AR Aging ImageBy: Ben Kramer, Credit and Collections Manager, Outdoor Research

The role of a Credit Manager in an organization has evolved through the years. More and more Credit professionals are getting involved in other areas of the company such as vendor compliance, operations and even customer service.  When I started my Credit career, the most widely used gauge on how effective a Credit Manager is in an organization is by DSO or Days Sales Outstanding.   It is a calculation used by a company to estimate their average collection period. It is a financial ratio that illustrates how well a company’s accounts receivables are being managed. There are multiple different ways of calculating DSO. But the most common calculation is by dividing the amount of accounts receivable during a given period by the total value of credit sales during the same period, and multiplying the result by the number of days in the period measured.  Which in my opinion is not an accurate measure of how good a Credit Manager is doing because it means when sales decline, the DSO increases.

The true measure of a good Credit Manager is how current their AR aging is.  It’s that simple.  Establish a comparative analysis of each aging columns against the previous week, the previous month and the previous year.

I’ve been working as a Credit Manager for more than 20 years and one common statement that most, if not all my previous bosses will say about me is how good I maintain my AR Aging. In one company I worked for, their AR Aging was so bad when I was hired, that only 46% of their receivables were current. There were numerous unapplied payments, immense number of open credit memos and most of the customer deductions were also left open on invoices to age. At first glance, you can’t even tell which are legitimate invoices and which ones are open deductions. Six months after I started in that job, their current receivables went from 46% to 99%.

The true measure of a good Credit Manager is how current their AR aging is. Period. It’s that simple.

So the question is, how did I do it? It’s very simple. Here are some key things that a Credit Manager should remember in order to achieve and maintain an excellent AR aging:

  • Run and review your aging report daily. Some Credit Managers only run their aging report once a week. Some may even only run it once a month. By the time they review it, another 7 or 30 days have passed. Cash is king!
  • Never leave a payment unapplied.  The rule of thumb is, if you don’t apply the payment, the invoice or invoices the payment was meant for will continue to age.
  • When there’s a chargeback or customer deduction, resolve the issue immediately. There is no reason why a deduction should stick around on your aging report for more than 30 days. Chargebacks are either valid or invalid. If you know that it’s valid, get rid of it.
  • Small balances matter. Most credit professionals don’t pay much attention to invoices or open balances of less than $100. Trust me, they add up. So the quicker you collect them, the cleaner your aging will look.
  • Use your sales representative to collect. I always find it helpful to develop a great relationship with my sales reps out in the field. They are my eyes and ears. Even though they feel it’s a conflict of interest to sell and collect, I always tell them that it’s their money, it’s their commission.
  • Know when to press harder on your customers for payment.  Maintaining a good relationship with your customers is key.  They need to be comfortable and trusting enough with you that when there’s a problem, they will tell you.  There are some that will take advantage of you if you are too nice.  So always know when to press harder for payment and establish authority.  Don’t be afraid to put an account on hold, regardless of their size.
  • Hold your Sales Team accountable. I’ve always had great relationships with my sales teams and I always encourage them to notify me of any “special deals” they make because the more you know, the quicker you can react.
  • Open credits and open payments are just as important as open invoices. Don’t let open credits or open payments linger on your aging longer than they should. Always encourage your customer to use them. If your customer is inactive, send them a refund check immediately.
  • Get everything in writing.  It is important to have something to back you up when pushed in a corner. Make sure that everything you say and do are documented.
  • And finally, trust your gut feeling. If you have worked in credit as long as I have, chances are you have encountered just about every excuse possible. When approving a new account for terms, review the information they provide you and if you feel something is not right, chances are they’re not.

Ben Kramer, is the Credit and Collections Manager for Outdoor Research in Seattle, WA since 2016. He’s been doing Credit Management since 1993, his prior experience includes tenures at Funko, Pacific Market International, Brooks Sports and Dakine. Since joining NACM in 1993, he’s been a member of the National Footwear and Apparel Credit Group and the National Consumer Products Credit Group, where he served as Board of Director from 2005-2010.