By Garrett Fisher
The subject of “how to get paid” is rather beat-up one filled with a host of differing slants that usually say the same thing. If those ‘same things’ worked flawlessly, then they would be implemented across-the-board and the subject would not be brought up. The fact is, customer payment trends is a constant battle that is the crossroads of the customer’s financial condition, how badly they need your products and services and what they think of your performance. To successfully improve cash flow, lower credit risk and eliminate bad debt requires a multi-pronged initiative that pervades many steps of the customer delivery process. Let’s start with the inception of the customer relationship.
The number one problem that surfaces when signing up a new client is the fear factor. Fear that the client won’t sign the contract, won’t order from you, will be turned off by collections practices. When layers of salespersons get introduced, fear increases and motivation decreases to care about getting paid. The focus turns to commissions and earning the sale and cash is left as an afterthought.
The most effective way to lay the groundwork for getting paid is to have honest communication about payment terms. “Net 30” is the de facto standard, so expecting less results in those terms being ignored and having terms of “Net 30” is viewed in the customer’s eyes as a flexible target. If the proposed relationship requires timely payment, then a simple note in the proposal to that effect is sometimes all that is needed. An invitation to discuss if paying in Net terms will be a problem makes it clear that it is expected, though you are not being so inflexible as to be unyielding.
An additional tool that reinforces the mechanism of pre-contract discussions and solves the late fee problem is to offer different pricing tiers based on different cash flow expectations. Depending on the industry, referring to the concept that “different pricing is available for customers who need longer terms” results in one of two things: awareness and possibly remuneration for late payment. For example, charging $87 for a service call when paid in Net 30 or $96 and allowing terms of Net 60. Late fees are generally useless – they operate on a pain model and inflict punitive charges for miscreant behavior. When customers are treated like children, they often act that way and the intended result is opposite of what is desired.
Having utopian conversations in advance is wonderful for future customers in a business. The reality, however, is that most companies with a collections problem have not done the above and now have a major quagmire on their hands. The following techniques apply as required ongoing maintenance as well as a starting point to put out cash flow fires that are burning.
Companies must have someone dedicated to recurring collections functions. Customers must know and be trained that 1) someone is watching and 2) if payments are late, it will be addressed. What amazes me in client situations where collections is a problem is the litany of reasons clients give me that the above statement can’t be done, will not work and that either we need to do other more expensive, painful mechanisms or the situation is hopeless. These words are generally spoken from clients who have never had personnel dedicated to collections and therefore do not believe that it could be so simple. It is really that simple.
Inherent in commencing dedicated collections activities is cleaning up issues on the accounts receivable aging. Companies without someone watching closely tend to have a host of bad debt, short payments, unapplied checks, late invoices and the like left on the aging. It is imperative to remove these items and institute procedures to keep the aging clean of transactions that the customer should not see. There is also the aftereffect of recognizing the expense of these items on the P&L as incurred, allowing for other parts of the organization to respond.
Another low hanging fruit for easy maintenance and also crisis management is to institute monthly customer statements. Most accounting software will produce customer statements – consisting of a listing of what invoices are due, their dates, amounts and due dates. Statements are not punitive action – they are friendly. Furthermore, companies routinely receive many statements. You will not be the first or the only one. Due to this volume of statements received, secretaries and mailrooms automatically route statements to accounts payable. Accounts payable generally automatically reconciles the statement against the system – ensuring that missing invoices are obtained from the company and entered into the accounting system. A/P professionals also tend to mention to Controllers and CFOs who is making collection calls and sending statements of account; hence, management is more likely to pay earlier. Statements reduce invoice delivery delays, remind the client you are watching and increase cash flow efficiency. As much as 30% to 40% of the work necessary to ameliorate a collections crisis can be accomplished by sending statements.
Issues come up with billing frequency and timeliness. Companies should bill as soon as possible after goods are shipped or services are rendered. In the case of services, billing should be tied to the customer’s emotional connection to services. If you are a CPA, the bill should come with the tax returns. For recurring contract professionals, weekly is superior to monthly (same for lawyers). Billing more frequently in these cases connects the value of the company’s services to the invoice received –versus the customer forgetting about the value of services offered and then finding the invoice more painful than desired. Appropriately billing frequency also prevents surprises as to cost levels and subsequent reactionary recoiling (i.e., slashing and burning) that “we can’t afford this much.” For companies not implementing this method, fear is generally a dominant factor that causes billing frequency delays – hoping to delay the “day of reckoning” where the client evaluates your services against the dollars spent on you. While it is a painful thought, it is better in the long run to know what the client is willing to spend beforehand as opposed to the proverbial slap on the wrist when the bill is too large.
Another key factor is to know when to pull the plug. Letting a client run up an enormous bill is the single most destructive factor that contributes to bad debt. If a client just keeps on making purchases and pays little to nothing, it is incumbent on the company to establish a credit hold and stop the damage before it gets too far. There are many lessons filled with grief and shame of companies having been taken for six figure losses when they were in complete control of stopping the bleeding. Fear again becomes dominant – cutting off a customer may mean losing one. It is better to come to the emotional grips that the customer may not really be a customer (an insolvent customer really isn’t a customer) before losing gobs of cash to arrive at the same conclusion (albeit a more expensive one at that point).
We’ll save one of the best and most insightful techniques for last. Credit reports should be pulled on all new customers and occasionally on large, recurring customers. Experian and D&B are common sources. Large companies report payment experiences to these credit agencies and the credit agencies scour state databases and courthouse records for bank liens, tax liens, judgments, collections activities and the like. Credit reports are easy indicators of insolvency, brand new/ultra-small businesses, and significant creditworthiness. They are also provide insight into potential customers that run up large bills and then find new suppliers as a forum to finance their losses or commit fraudulent behavior. Fear motivates companies to not hold potential new customers with a healthy dose of skepticism; hence, running like a bull to the slaughter into the guillotine of a fraudster. Credit reports often cost around $50.
While dealing with the unpleasant reality of getting paid is bothersome to most, it is a part of a company’s operations that manifests the reality of profitability and customer relationships. Like any well-oiled machine, some healthy preventative maintenance goes a long way to ensure reliability and cost-savings in the long run.