Cash Flow To Is Interest Paid Less Net New Borrowing. Accounts Receivable Collections – How to Get Late-Paying Customers to Pay on Time

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Accounts Receivable Collections – How to Get Late-Paying Customers to Pay on Time

A year or two ago, your business was probably running pretty smoothly, with sales and profits growing. And then the recession and the credit crunch hit—a brutal double whammy—and everything started to slow almost overnight, including collecting your accounts receivable.

Whether it’s commercial or consumer services, your customers have increasingly started paying your accounts receivable as if they were using yours money to fill your own credit gap. Well, they probably are.

Most of us don’t realize how dependent we are on credit to run our businesses. Seller’s 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 give your customers interest-free loans, even if you finance these loans with a bank loan that you pay interest every month.

When debt collection occurs on time, everything seems to turn out well. But when receivables slow, you still have to replace the goods you sold, pay your employees (on time), and pay the rent and all the other costs of running the business. Assuming your bank lines of credit are in place and your margins are adequate, you will incur slightly higher interest costs, but you will be able to pay them off with your customers. But if your lines of credit or cash reserves aren’t enough to protect against a sudden change in cash flow, your business could be in big trouble. remember this

Strategies that work

It is therefore best to encourage your customers to pay their receivables on time. “That’s useful,” you’re probably thinking, “but how do I do it?” Here are five ideas that can help you improve your debt collection:

1. Impinvestigate your credit granting practices. On the front end, do more thorough vetting of new customers before granting them lines of credit. Spend a few dollars to actually get a credit report and a few minutes to call a few credit references to get a feel for what kind of relationship they have with your prospect. You might ask about their payment patterns when the economy slows down, which might be different than in good times. The comment that “sometimes it’s hard for them to stay in the flow, but they always manage to catch on” could be a red flag these days. Also, pay attention to a potential customer who has changed supplier more than once in the past year. If you can find out the name of their previous supplier, that is someone you should talk to.

2. Strive to collect – all the time. At least one person in your company should be responsible for monitoring collections. Don’t make the mistake of giving the work to your supervisor to do in her “free” time. He probably doesn’t have any free time, and accountants aren’t usually the best at communicating with clients, especially when the subject is touchy. Assign the job to someone who is a good negotiator, has a friendly but firm phone personality, and understands that this is a critical job. The most important thing is to do what you said you were going to do. If you promise something in exchange for immediate payment, make sure you deliver. If you say you must refuse future shipments until the account is current, stick to it – every time.

3. Call customers before payment due date. Have your collections person call the customer’s accounts payable department a few days before the payment is due “as a courtesy” to make sure everything is in order and the check will go out on time. This little reminder, if placed with kindness and willingness to help, can become a friend to the person actually cutting the check. If your client is missing something they need to pay you, this would not be a good time to be humiliated by their inefficiency. Your effort to secure it quickly can put you at the front of the queue for payment.

4. Offer prompt payment discounts. This is a proven technique that worked well years ago, but has become less common in recent years as business practices have evolved. The old ‘2/10 net 30’ was and still is a fantastic offer if we explain it clearly to customers. Note that the 2% discount for paying 20 days earlier than usual amounts to an annual return of 36 percent. That’s not a bad return for a client whose savings account is likely earning 2 percent a year or less. Even if your customers were scheduled to pay in 45 days, getting them paid in 15 days means a 24% annual return. You can juggle the numbers in any way that makes sense in your industry, but the key is for the customer to understand the value they get from instant payment. And some organizations, like many local governments, are required by their policies to take advantage of such discounts.

5. Create a “Preferred Customer” plan. Want to think outside the box? Consider creating a special program for “special” customers that offers services such as free overnight shipping on rush orders, additional discounts, advance notices 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 according to your terms. Don’t make high order volume a condition if your low volume customers generate higher margins than is often the case. A small bill that is paid on time is a blessing compared to a large one that takes 90 days to pay. The list of terms should be strong enough that it doesn’t look like a poorly disguised collection program. Use this as an opportunity to reward customers you enjoy doing business with, especially those who pay on time everyone time.

Meeting expectations

While you can appreciate the dilemma of your customers trying to grow their money, that’s not the same as agreeing to be their interest-free banker. You can extend their payment terms, as many companies do in times like this, but in the end you still have to take the money by a date you can schedule. Of course, you also need to avoid alienating your customers in the process. But if you do everything you say you will – provide quality products at competitive prices with fast delivery – then it’s reasonable to expect your customers to do everything they agreed to, including paying on time.

However, the reality is that most suppliers will see a lot of their customers get paid late in tough economic times. If you follow these suggestions, however, you can be the exception to the norm—and in a better position when the economy turns around again, as it always does.

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