Late-Paying Customers to Pay on Time
Your business was
running pretty smoothly – sales growing, and profits growing, too –
and then the credit crunch hit, someone said the “R” word and
everything started slowing down almost overnight. Most troubling of
all, your customers have been paying you later and later, as if they
are using your money to fill their own personal credit crunch.
Well, they probably are.
Most of us don’t
realize how dependent we are on credit to run our businesses. Vendor
open account credit – the kind you extend to your customers – is by
far the largest source of borrowing power in our economy. When you
sell your products and services on credit, you are making
interest-free loans to your customers, even if you are financing
those loans with a bank loan for which you pay interest every month.
When collections roll in on time, it all seems to work out nicely;
but when collection slows down, you still need to replace goods
you’ve sold, pay your workers (on time), and pay the rent and all
the other expenses of running a business. Assuming your bank credit
lines are in place and your margins are adequate, you have a bit
higher interest expense and you can ride it out with your customers.
However, if your credit lines or cash reserves aren’t sufficient to
cushion you from the sudden change in cash flow, your business could
be in big trouble. Besides, most bad debt write-offs come from old
balances, not current ones. The older the balance, the higher risk
it will never be collected.
So, your best bet
is to encourage your customers to pay on time. No added interest
expense, no hassle with customers, no write-offs, everyone is happy.
Well, you are probably thinking, ”That was helpful. How do I do
that, exactly?” Here are five ideas that can work well for you.
On the front end,
screen new customers more closely before granting a credit line.
Spend a few dollars actually getting a credit report, and a few
minutes calling a couple of their credit references to get a sense
of the relationship they have with your potential customer. The
conversation might go to their payment patterns when the economy
slows, which could be different from good times. A comment that
“they sometimes struggle to keep current but they always manage to
get caught up” could be a red flag these days. Also, be watchful of
a prospect who has changed suppliers more than once in the past
year, and if you can learn the name of their previous supplier,
that’s someone you want to talk to.
collection effort, all the time:
follow up a key duty of at least one person in your company. Don’t
make the mistake of giving the job to your controller to handle in
her spare time, just because Accounting handles the money. She
likely doesn’t have any spare time, and besides, accounting
personnel are not typically the best in customer communication,
especially if the subject is touchy. Assign the job to someone who
is a good negotiator, has an amiable but firm phone personality, and
who understands this is a key job. Most importantly, do what you
say. If you promise something in return for prompt payment, make
sure you deliver. If you say you must deny future shipments until an
account is brought current, stick to it – every time. Key point: If
your collection practices have been lax in the past, a culture
change may be needed in the minds of your customers, who may be
tempted to ‘wait you out’ to see how long the new rules will stick
around. This is called a test.
3. Call ahead of time to make sure they’re ready to
Have your collection person call the customer’s Accounts Payable
department a few days before the due date for payment, “as a
courtesy” to your customer, just to make sure everything is in
order, there were no problems with the paperwork, and the check will
be going out on time. This little reminder, when positioned with
friendliness and desire to help, can make a friend of the person who
actually cuts the check. And if your customers are lacking something
they need in order to pay you, this would not be a good time to be
condescending at their inefficiency. Your effort to quickly provide
it without them having to run it down in their company instead,
could put you at the head of the line for payment.
4. Discounts for
This is an old
technique that worked well years ago, but has fallen into neglect in
recent years as business practices evolved. The old ‘2/10 net 30’
was, and still is, a fantastic deal if explained to customers
clearly. Consider this: a 2 percent discount for paying 20 days
earlier than normal amounts to an annual return of 36 percent; not a
bad yield for a customer whose savings account is probably earning 2
percent a year. Even if your customers planned to pay in 45 days,
getting them to pay in 15 days instead represents an annual return
to them of 24 percent. You can juggle the numbers any way that
makes sense in your industry, but the key is getting the customer to
understand the value they get from paying promptly. And by the way,
if you do business with certain organizations, e.g., local
governments, many of them are required by their policies to take
advantage of such discounts. Key point: You must be strict about
charging back discounts taken when payments don’t come in on time,
as some customers will try.
5. The “Preferred Customer” plan:
Want to think out
of the box? Consider a special program for “special” customers –
free overnight delivery on rush orders, extra discounts, advance
notice of price changes, special sales, etc. Promote this as a
customer benefit and make it available only under certain
conditions, one of which would be consistent payment in accordance
with your terms. Don’t make sheer order volume a condition if your
low-volume customers produce higher margins, as is often the case. A
small invoice that gets paid on time is a blessing compared to a
large one that takes 90 days to come in. Still, make the conditions
list beefy enough that it doesn’t look like a poorly disguised
collection program. Use it as an opportunity to reward the customers
you enjoy doing business with, especially those who pay on time
every time. Key point: Avoid the risk of alienating customers who
are in the program but then fall behind in one or more criteria.
Give them the opportunity to rejoin the program after 2-3 months of
again meeting all conditions for participation.
You can appreciate
your customers’ dilemma in trying to stretch their cash. But that’s
not the same as agreeing to be their banker – interest free! You can
extend their payment terms, as many companies do at times like
these, but in the end you still need to collect your money by a date
you can plan on. And you need to avoid alienating your customers in
the process. If you do everything you said you would – quality
products, competitive price, prompt delivery, etc. – then it’s
reasonable to expect your customers to do everything they agreed to,
including prompt payment. Still, these days most suppliers will get
paid late by most of their customers. Follow the suggestions above
and you can be the exception to the norm, the stand-out in the
crowd, and certainly a better positioned company when the economy
turns around again, as it always does. Wouldn’t that be great?
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