Reducing accounts receivable in distribution: 7 practical tips

Sales volume is up, products are leaving the warehouse, and sales agents are taking orders. Yet the company is still scrambling to find money to cover suppliers, logistics and staff costs.

In this situation, the problem is not a lack of trade. More likely, the money for products already sold is not coming back on time.

Reducing receivables cannot be solved just by calling the customers who owe you. To do it, your credit terms, credit limits, order control, documentation and collection process must all work as a single system.

What is accounts receivable?

Accounts receivable arises when the distributor has delivered the product to the customer but has not yet received payment.

For example, a product worth 10 million soums is delivered to a point of sale on the condition of payment within 14 days. Until payment is received, this amount is the distributor's receivable.

Accounts receivable is not a problem in itself. Selling on credit can let customers buy more products and increase the distributor's sales volume. The problem arises when the debt exceeds the agreed term, or when the amount begins to put pressure on the company's cash flow.

In this case, the company's money is not tied up in product, but in the customers' unpaid accounts.

Why does debt increase in distribution?

There is no specific rule for credit sales

In some companies, the sales agent decides on their own how much credit to give, to which customer, and for how many days. The decision is based on the customer's wish to close the sale, not on their payment history or financial situation.

As a result, a new and unverified customer can get products on the same terms as a disciplined customer who has cooperated with you for many years.

All customers are given the same credit limit

The credit limit — the maximum amount that can be extended to a customer at one time — should match the customer's trading volume and payment discipline.

Giving a 30 million soum limit to a point of sale that sells 5 million soums' worth of products a month creates extra risk. Conversely, setting too low a limit on a large customer who pays on time can hold back sales.

New orders are accepted before old debt is settled

When taking an order, a sales agent may keep selling to a customer without seeing that customer's total debt, overdue payments or remaining credit limit.

In this case, the debt builds up through several consecutive orders, rather than from one large transaction.

The sales agent's KPI is tied to sales only

If the agent's bonus is based only on the value of product removed from the warehouse, their main goal becomes increasing orders. Whether the product is actually paid for becomes secondary.

A company may hit its sales plan, yet part of those sales has not turned into cash.

Debt information is scattered

Accounting may show one amount, the sales agent's book another, and the customer a third. If a returned product, discount, partial payment or document error is not entered on time, the parties cannot agree on the size of the debt.

As a result, the customer asks you to reconcile the account first, instead of making the payment.

Collection starts late

Contacting the customer several weeks after the payment deadline makes the debt harder to recover. By then the customer may have forgotten the debt, the responsible employee may have changed, or the document may be missing.

Debt management should start before the payment deadline, not after.

Which indicators should you monitor?

Seeing only the total amount of debt is not enough. The manager should also know the composition of the debt and how long it has been outstanding.

Ageing by due date

Debts can be divided into the following groups:

• the payment term has not yet arrived;

• 1–7 days late;

• 8–30 days late;

• 31–60 days late;

• 61–90 days late;

• more than 90 days late.

This is an ageing analysis of the debt. It helps you decide which customers to start collection work with.

Share of overdue debt

The indicator is calculated as follows:

Share of overdue debt = overdue debt ÷ total receivables × 100%

For example, if the total debt is 500 million soums, of which 125 million soums are overdue, the share of overdue debt is 25%.

This is a rough benchmark. The company should set an acceptable ceiling based on its credit policy, margins and cash flow.

DSO: the average time it takes to collect

DSO, or Days Sales Outstanding, shows how long it takes for sales to turn into cash.

Simplified formula:

DSO = accounts receivable ÷ credit sales × number of days in the period

For example, if receivables at the end of the month are 300 million soums, and credit sales for the month are 600 million soums:

300 ÷ 600 × 30 = 15 days

In this example, the company takes an average of 15 days to turn sales into cash.

Tracking DSO by individual branches, regions, agents and customer groups gives a clearer picture of where the problem lies.

Customers who exceed the credit limit

In particular, the manager should see:

• customers whose limit has expired;

• customers who exceed the limit;

• customers who placed a new order while carrying old debt;

• customers who are regularly overdue.

7 steps to reduce accounts receivable

1. Reconcile the debt information first

Before making demands on the customers who owe you, you need to confirm that the amounts in the system are correct.

The following should be available for each open debt:

• customer name and point of sale;

• contract or agreement;

• order and invoice document;

• product delivery date;

• payment term;

• amount paid and amount remaining;

• returned products;

• responsible agent or manager.

If there is a discrepancy in the amount owed, it is reconciled with the customer. An incorrect balance, missing payment or unreturned document is corrected separately.

2. Group customers by payment discipline

Instead of applying the same terms to every customer, you can group them by payment history.

For example:

• Group A: stable customers who pay on time;

• Group B: customers who sometimes delay but do pay their debts;

• Group C: customers with regular delays or disputed debts;

• new customers: customers who do not yet have a sufficient payment history.

A Group A customer can be given a longer payment period or a larger limit. For Group C, consider reducing the limit, requiring partial prepayment, or switching to cash-only trading.

It is a mistake to define a customer group on sales volume alone. A customer who buys a lot of products but always pays late can be a high risk.

3. Set the credit limit and payment period separately

The credit policy should answer at least the following questions:

• who may sell on credit;

• who approves the limit;

• what the initial limit is;

• how many days the payment term is;

• in which cases the limit is increased or decreased;

• whether a new order is issued once a delay begins;

• who approves exceptions.

When setting the limit, take into account the customer's average purchase, payment history, number of delays, current debt and length of cooperation.

The sales agent should not be able to change the limit on their own. Exceptions should be confirmed by the responsible manager, and the reason for the decision should be stored in the system.

4. Check the debt at the time of ordering

Debt control should run when the sales agent takes the order, not after it is confirmed.

The agent should be able to see:

• the customer's total debt;

• overdue debt;

• the nearest payment date;

• the available credit limit;

• the total debt after the new order.

If the customer exceeds the limit, or the old debt is above the set threshold, the system can stop the order or send it to the manager for approval.

This way the problem is handled before the new, risky sale takes place, rather than after the debt has piled up.

5. Control delivery and payment documents

If the product has been delivered but there is no proof that the customer received it, a dispute can arise at the time of payment.

Therefore, during delivery, the following must be clearly recorded:

• the order contents;

• the product actually delivered;

• the recipient;

• any returned item;

• the date of receipt;

• the payment term.

Payments received in cash or in other forms must also be entered into the customer's balance the same day. Otherwise the figures held by the agent, the cashier, accounting and the customer will start to diverge.

6. Define the reminder and collection sequence in advance

Instead of contacting the customer only after the debt period has passed, you can introduce a step-by-step procedure.

For example:

• a reminder 2–3 days before payment;

• resending the invoice and payment details on the payment day;

• contact through the agent 1–3 days late;

• escalation to the responsible manager at 4–7 days late;

• limiting new orders on a longer delay;

• if the problem is not resolved, deciding the next measure according to the finance manager and the company's legal procedure.

Each step should have a responsible person, a method of communication and a way of recording the result. If the customer says "I will pay on Friday," the date of that promise should be recorded in the system and checked that same day.

If penalties, service charges or other legal measures apply, they should be clearly stated in the contract and checked with a lawyer.

7. Link the sales team's KPI to collected revenue

Measuring a sales agent's result only by the value of the order or the delivered product can raise the risk of bad debt.

The KPI system can also include:

• the share of sales not yet overdue;

• the amount collected against the plan;

• overdue debt in the agent's portfolio;

• the customer's compliance with payment promises;

• the reduction of long-term debt.

This does not mean turning the agent into an accountant or a collector. Their job can be to stay in touch with the customer, remind them of the payment terms, and report problems to the finance department in time.

A 30-day action plan to reduce receivables

First week

• preparation of the debt register;

• reconcile balances with customers;

• separate debts by maturity;

• identify the largest and oldest debts.

Second week

• group customers by payment discipline;

• revise credit limits and payment terms;

• create a list of customers who have exceeded the limit;

• assign the people responsible for credit sales.

Third week

• introduce the reminder and collection steps;

• start recording payment promises;

• control new orders from customers with old debt;

• approve a single working procedure for the sales and finance departments.

Fourth week

• recalculate the share of overdue debt;

• analyse DSO and payment discipline by customer and agent;

• identify the measures that did not work;

• draw up a collection plan for the next month.

It is not always possible to close all the debt in one month. The first goal is to clean up the debt information, limit the creation of new overdue debt, and move to regular collection management.

How does Sales Doctor help with debt control?

In Sales Doctor, the manager can centrally monitor the debt, payment period and sales history of a customer segment. When taking an order, the sales agent sees the customer's current debt and available limit.

In line with this topic, the system helps to manage the following processes:

• checking the customer's debt at the time of the order;

• control of credit limits;

• separation of overdue debts;

• debt analysis by agent, region and customer;

• keeping payment information in one place for the sales and finance departments;

• automating payment reminders.

The system itself does not collect the debt. The result depends on the company's credit policy, the accuracy of the information, the responsibility of the employees and adherence to the established procedure.

FAQ

Do you need to write off accounts receivable?

Not necessarily. Selling on credit can be part of a distributor's commercial policy. The main task is to keep debt at a level consistent with the agreed term and the company's cash flow.

How is the credit limit determined?

The limit is set based on the customer's average purchase, payment history, number of delays, current debt and length of cooperation. A lower initial limit may apply to a new or high-risk customer.

Can you give new products to a customer who owes money?

It depends on the company's credit policy. If the payment deadline has not yet arrived and the customer has not exceeded the limit, the sale can continue. In the case of overdue debt or an exceeded limit, it is better to send the order for additional approval.

What should DSO be?

There is no single standard for all distributors. DSO depends on the company's payment term, product category and customer mix. It is more useful to compare it with the previous period, your fixed payment terms and specific customer groups.

Who should be responsible for the debt?

The tasks of the sales agent, sales manager, finance department and accounting should be defined separately. Final control should rest with one responsible manager or department.