The following is an excerpt from a conversation between the office manager, Mark Cottman and the president of Horowitz Construction Supplies, Co., Rosa Mullin. Horowitz sells building supplies to local contractors.
Mark: Rosa, we’re going to have to do something about these overdue accounts receivable. One-third of our accounts are over 60 days past due, and I’ve had accounts that have stayed open for almost a year!
Rosa: I didn't realize it was that bad. Any ideas?
Mark: Well, we could stop giving credit. Make everyone pay with cash or a credit card. We accept MasterCard and Visa already, but only the walk-in customers use them. Almost all of the contractors put purchases on their bills.
Rosa: Yes, but we've been allowing credit for years. As far as I know, all of our competitors allow contractors credit. If we stopped giving credit, we’d lose many of our contractors. They’d just go elsewhere. You know, some of these guys run up bills as high as $60,000 or $80,000. There's no way they could put that kind of money on a credit card.
Mark: That’s a good point. But we've got to do something.
Rosa: How many of the contractor accounts do you actually end up writing off as uncollectible?
Mark: Not many. Almost all eventually pay. It's just that they take so long!
Suggest one or more solutions to Horowitz Construction Supplies Co.'s problem concerning the collection of accounts receivable.
One possible solution to Horowitz Construction Supplies Co.'s problem concerning the collection of accounts receivable could be to implement stricter credit and payment terms for contractors. Here's how you can arrive at this solution:
1. Identify the key issues: The conversation between Mark and Rosa highlights the following issues:
- A significant portion of accounts receivable is overdue, with some accounts remaining open for a year.
- Contractors primarily put purchases on their bills, rather than paying with cash or credit card.
- Concerns about losing contractors if credit is entirely stopped.
2. Analyze the current situation: Assess the impact of the existing credit policy on the company's cash flow, profitability, and customer relationships. Consider gathering data on the average payment durations, outstanding balances, and potential revenue loss if credit is discontinued.
3. Evaluate potential solutions: Based on the analysis, propose the following solutions:
a) Introduce revised payment terms: Modify the existing credit policy to include stricter payment terms for contractors, such as shorter payment periods or penalties for late payments. This could incentivize contractors to pay on time and discourage excessive delays.
b) Conduct credit reviews: Review the creditworthiness of contractors before extending credit. This could involve evaluating their financial stability, prior payment history, and outstanding debt. Identifying risky contractors upfront can help minimize the likelihood of non-payment.
c) Implement rigorous collections process: Strengthen the company's collections process by consistently following up with customers regarding overdue payments. This may involve sending regular reminders, initiating phone calls or meetings to discuss outstanding balances, and potentially employing external collection agencies for high-value delinquent accounts.
d) Offer alternative payment options: To address concerns about contractors being unable to pay large sums with credit cards, explore alternative payment methods such as setting up installment plans or providing financing options for significant purchases. This could alleviate the strain on contractors' cash flow while ensuring timely payment for Horowitz Construction Supplies Co.
4. Assess the potential impact: Evaluate the potential impact of each solution in terms of customer retention, cash flow improvement, and overall effectiveness. Consider conducting a cost-benefit analysis to determine the feasibility and potential return on investment for implementing the proposed solutions.
5. Implement and monitor progress: Begin implementing the chosen solutions, and closely monitor their effectiveness. Track key metrics such as reduction in overdue accounts, improvement in average payment durations, and changes in customer satisfaction levels. Regularly review and adjust the strategies as needed to optimize the collection process while maintaining positive customer relationships.