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A Publisher’s Cash Management Plan: Part 2–Managing Your Accounts Receivable

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Every publisher–in fact, every company in any field–must manage all of its outstanding accounts receivable, which may include promissory notes, employee advances, rights and licensing payments, and even income tax returns. This article focuses on the basics of managing your trade accounts receivables.

 

Customer Considerations

A diverse group of industry segments and customers will help your company avoid financial problems when an industry segment or a single customer has an economic problem. A broader industry base also reduces your risk from returnability.

Help and support good-paying customers and fire bad-paying customers. A customer that does not pay its bill is not really a customer and the sale to it was not really a sale.

Your A/R reporting should give you the ability to segment accounts by customer type. Learn what each segment means to you in terms of sales concentration, returns, credit worthiness, and “days sales outstanding” (see below). This way you can track the differences between and among stores, libraries, and wholesalers.

Ideally your customer mix will provide money at several points over a range of time via cash sales to consumers or special sales; 30-60 day terms for non-book- trade sales; 85-90 day terms for sales to Ingram, B&T, Borders, and B&N; longer terms for sales to national distributors that must wait to be paid before they pay you; and sales overseas with terms that typically run 180 days.

A/R terms are
Œp long in the book industry and are further complicated by returnability. Push too hard for collection and you get your books back as payment. Gone today–here tomorrow. As a result, it is helpful to sell into channels outside the book industry, where payment terms are usually shorter, and into channels that customarily do not make returns.

Whoever the customer is, your systems must work properly from the time the customer places an order. Make sure that customer terms are clearly understood from the point of sale and that they match the invoice. Correctly ship and verify counts or weights. Ensure adequate packing. Include packing lists and maintain proofs of delivery for every shipment.

 

Collections

Retailers and wholesalers pay their most important vendors first and–no surprise–those are the largest publishers, distributors, and wholesalers. To compete for collections, you must be persistent, personable, and on top of your accounting.

Collecting your money can sometimes be like charming a cobra out of a basket without getting bitten. You need to be proactive when dealing with customers and not wait to try to collect until your company is desperate for the cash.

Collection efforts should start when you receive an order, not when you ship. Begin by sending the customer a credit application that asks for accounts payable and bank references. For a new customer placing a large order, get a credit report. Then check the customer’s references and decide on its credit limit and credit terms. Although COD is generally a good option for new customers and for established customers with a history of payment problems, it is uncommon in the book trade, which means that the best way for you to get outstanding invoices paid is to call the customer’s account payable department.

Direct customer contact is your best collection tool because it allows you and the customer to have a dialogue about when your invoice will get paid. After you call customers who have received past due invoices, follow up promptly on any reasons they give for not paying and follow up daily on any new invoices that go past due. Mail your statements of A/R activity so that they arrive between the 20th and the 25th of the month, prior to an end-of-month payment cycle, and add handwritten notes to get attention. To minimize future collection problems, always follow customer terms and credit limits, review them carefully when a customer requests changes, and try kindness–thank customers for paying on time.

When a trade invoice, customer account, or note is deemed to be uncollectible because of age, a bankruptcy, a dispute, or for any other reason or reasons, management can decide whether to write it off immediately or at some future date. The publishing standard for bad debt is _ to 1% per year of trade sales made on account.

 

The Payments Matching Game

One of the biggest problems growing publishers face involves unreconciled invoices from major accounts. Too often a publisher receives a net check for $15,000 where the customer is paying $20,000 worth of invoices and has claimed $5,000 in credits. The publisher applies the $15,000 to the open invoices and leaves $5,000 showing as unpaid. They matched the cash–right? Within months, the situation becomes a nightmare. The customer has paid all the invoices yet the publisher shows them open and past due.

With the customer placed on credit-hold to pay invoices they have already paid, sales suffer. And if the publisher has accounts receivable financing, the account falls out of eligibility and the borrowing ability is lost.

Avoid this situation by reconciling every check stub and communicating problems to the customer immediately. Unreceived returns or returns shortages need to be charged back. Pay all invoices, apply all credits, and issue chargebacks to keep the customer’s account in balance. Major accounts need additional follow-up every three to six months on chargebacks and other unresolved claims.

 

Days Sales Outstanding

Trade collection efforts can be monitored with the use of a metric called Days Sales Outstanding (DSO), which measures how many days it takes to collect accounts receivable. Once you understand what this means and what factors affect it, DSO can provide a powerful understanding of accounts receivable dynamics. Though there are many DSO formulas, we recommend dividing current trade accounts receivable by the last 90 days’ charge sales and multiplying by 90 days. The resulting number is your DSO.

For example:

A/R $100,000


———— = 1.2 x 90 days = 108 Days Sales Outstanding

Last 90 days $ 83,000

charge Sales

 

Your DSO shows how fast a customer’s invoice will be turned into cash. The DSO formula can be affected by sales cycles (large sales months push it down and low sales months push it up), by quality of sales (slow paying customers or bad debt remaining in accounts receivable raise it), and by accounts receivable write-offs (which lower it). To understand the reasons for variations in the DSO, every publisher and financial manager should monitor it at least weekly. Better still, incorporate the DSO metrics in your daily financial reports. It is important to build DSO into the cash flow model discussed in our previous article.

 

[subhead] Collection Is the Key

Collecting your A/R is the #1 key to staying alive in the publishing business, so A/R collections activity and reconciliations are a daily task and the whole company, including the sales staff, needs to support A/R collection efforts. Customers tend to pay companies that call them on a regular basis.

 

A Co-Founder and Publisher of two successful trade book publishers–HPBooks and Fisher Books–Howard W. Fisher recently started The Fisher Company, a consulting company that helps growing publishers with financial matters, operations, business development, and mergers and acquisitions. He is a former PMA President and a frequent PMA University presenter.

 

Daniel R. Siburg is a CPA at The Fisher Company (7493 N. Oracle Road, Suite 125, Tucson, AZ 85704; 520/547-2460).

 

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