The Importance of Contract Management to Accounts Receivable

My last posts on accounting systems and accounts receivable management briefly detailed the areas to which you should be paying attention and also described the importance of the quotation process and pricing administration. The contract management process is of equal importance to help make sure you are set up correctly to engage your potential customer and start collecting cash. Managing the administration of contracts is extremely important and management teams should pay close attention to this act to avoid potential non-collections.

Specific things to focus on/consider are:

• Make sure the contract is signed by both the buyer and seller (this should be obvious)

• Verify signatory is authorized – the contract should have language in it stating that the signatory is authorized and the relationship manager or someone in finance should verify it

• Implement an auto-renewal clause (where possible) and consider building in a process where 45 days prior to auto-renewal someone from sales will contact the customer to confirm the renewal

• If no auto-renewal is present and the contract is near expiration, consider an escalation process and involve senior management to retain the deal

• On contracts where the amount is past due and it is near the point of a renewal (and the customer is not looking to cancel), do not renew the contract until the balance is paid

• Utilize software tools to help track all contracts and their start/expiration date (example, salesforce.com)

By implementing a solid contract management process, you will help eliminate issues during times of collections. The more you can reduce your A/R days and improve collections, the better your cash flow and the less your dependency on outside growth capital (the best funding source after all is your customer!)

-KKF