Customers thinking they can slip by without paying this supplier on time have another think coming. They'll find themselves dealing with an organization with no blind spots, no loose ends and nothing left to chance. That's the payoff of really well-thought-out accounts receivable standing operating policies.

Hurricane Wilma's pounding of southeastern Florida's coastal cities earlier this decade, with nearly 28,000 homes destroyed or rendered uninhabitable, resulted in a major surge in business for the area's building material supply companies. It also resulted in a major surge in headaches of those companies' credit managers.

Insurance checks were what customers were looking for to pay contractors and what contractors were looking for to pay material suppliers. But insurance checks can be a long time in coming. And they often didn't reach some victims of Hurricane Charley, another major hurricane, that struck earlier.

Some of these collection problems have no near-term solutions. You can't get blood out of a stone. But suppliers with well-devised credit and collection systems will ride out this difficult period the best. Right at the top of the list of these is Masco Contractor Services, Inc., in Daytona Beach. That's due, in large part, to Masco's Accounts Receivable Standard Operating Polices (SOP), a 13-page document that is meticulously worked out and rigorously enforced.

"It is the Division Manager's responsibility to see that one person is given 100 percent collection responsibility," states the policy in part under the section entitled "Reviewing Accounts Receivable." "This responsibility must be given top priority above all other duties."

Doing What We Need to Do'

Masco Director of Credit Tom Sacher, who drafted and champions the SOPs, says, "Oftentimes, we can be our own worst enemy when we don't get paid. If we do what we need to do properly, our chances of getting paid are excellent."

Much of the SOP document covers credit security measures specific to the construction industry (e.g., notices to owners and other first notice requirements, payment and performance bonds, filing of lien, etc.). As to the Receivables Aging Sheet, the policy requires that the branch A/R person call new accounts 15 days after the invoice date.

"This 'soft call' is the occasion for us to determine that our customer received our invoice, find out who pay the invoices, what their billing requirements are, when they normally cut checks, etc," the SOP document points out. "As such, it is a good way to introduce yourself to the new customer and establish rapport immediately. This first call also sends the message that we take a professional approach to the collection of our receivables."

Invoices reaching the 30-day mark become the responsibility of the division manager, who must ensure that the A/R person is making calls and also keeping all proper documentation on the AR Aging Sheets, a call log, note fields within the A/R computer program, or in some other recordable form. These notes must include dates of calls, people talked to, promises and commitments made, and so on.

"At this point, the A/R person must inform the division manager at their weekly credit meeting of all communications with the customer regarding outstanding invoices and commitments for payment," states the SOP. "The division manager will be taking further action himself, through the salesperson or other sources."

Meetings Get Everybody Involved

Dave Fiene, who is division manager for Masco's Miami, Florida branch, says these weekly meetings are the epicenter of the company's formidable credit and collection program. "The most important thing in collections is to have everybody involved," he says, "and the weekly meetings are where we do it."

At these meetings, he sits down with his receivables and sales people and reviews the aging list "from A to Z." Together, they decide who's going to make the calls and how the calls will be made. His A/R person is diplomatic and unlikely to offend customers, but sometimes it's the salesperson that gets the nod. It all depends on the particular customer relationship.

"We're not hardnosed, but we're relentless," he says. "The worst thing you can do is not make a call at a predetermined point in time."

Accounts reaching the 60-days point are reviewed to determine if a "stop-work" order should be initiated. The SOP states that the division manager will be held 100 percent responsible for debts on work done beyond the 60-day point unless the credit manager has approved extended terms in writing. This responsibility is potentially costly. "The manager will be penalized dollar for dollar for every dollar written off to bad debt that is attributable to an A/R SOP violation," the policy on "Personal Responsibility" states. These penalties are deducted from management bonuses and can be carried forward year to year.

'Front-Door' Work

But bad debt incurred by the branches tends to be minimal both because of tenacious collections and scrupulous "front-door" work done on all accounts. "We don't create a work ticket with a customer without a credit application, a proposal, and a signed contract," says Fiene. "Once we do that, we file our Notice to the Owner, unless we're in a priority position with the contractor and the lending institution."

Notice to the Owner (sometimes know as Pre-Lien or Preliminary notice) advises the owner that the company is working on the property and is seeking to preserve whatever lien rights are available under state law. Masco requires these notices for all jobs over $1,500 and recommends them for jobs under that amount with new or marginal customers. Division managers are responsible for keeping abreast of the lien laws in the states where they operate and are liable--dollar for dollar--for bad debts resulting from lien rights lost due to failures of timely filing.

"Keeping track of lien rights is a key part of hands-on management," acknowledges Fiene. "You have to file on time, and you don't want to wait until the 89th day of a 90 day expiration period to start making calls."

Customers You Want to Lose

"Our customers get used to the way we operate. If you file a lien, you're going to aggravate somebody. But the customers you lose are apt to be the ones you want to lose."

The credit services department provides a host of services to the branches, including conducting A/R training sessions in collection techniques and lien law seminars. All branches are reviewed at least once a month by an assigned regional credit manager who reports on SOP compliance and suggests areas for improvement. The branches are ranked according to overall company performance, and there's great competition among branch managers to rise to the "top of the hill".

"Our A/R Policies have withstood the test of time with only minor modifications", says Sacher. "With the branch managers attending to the day-to-day A/R collections, I can spend my time where it's most productive--dealing with the exceptions, those accounts that require litigation or other special treatment. It's an approach that has produced outstanding results."

Editor's Note: This article originally appeared in the Credit & Collection Manager's Letter.