Your customers are looking for ways to improve their cash flow — especially in tough economic times. Unfortunately, their solutions include paying bills later at the expense of your cash flow. But there are proven strategies that you can use to minimize your accounts receivable collection times.
As corporate controller for several oil-and-gas exploration and production “wildcatters,” I learned from the masters about the strategies of “slow pay” and “smart pay.” With slow pay strategies, clients delay until they no longer have excuses not to pay you. Smart pay strategies are about paying the vendors who are critical to your operations first at the expense of noncritical vendors. Now, as I consult with small businesses on accounting matters, I find that anticipating the kinds of payment strategies that clients might employ helps put the businesses extending credit back in control.
Expect the Best but Prepare for the Worst
I’ve always wanted to believe the best of people, but have found that the best accounting strategy is to believe the best but prepare for the worst. Even good people with good intentions can get into financial trouble. Years ago I had a consulting client, an oil-and-gas wildcatter, who went broke and took my neighbor’s office supply business down with him. John, the wildcatter, was a wonderful guy whom I greatly respected. But he caused my neighbor, Brian, to lose everything.
There’s a lesson you can learn from this. The first mistake Brian made was to allow John’s business to become a major source of his revenue without paying attention to John’s financial status. Second, Brian continued to supply John when John began to have difficulty paying his bills. Brian, in effect, became an investor in a troubled company — his investment being the cost of the goods he sold John.
It’s so easy for us business owners to get into Brian’s situation. We have one especially great and loyal client. The money is easy, life is good, and we can relax and enjoy it. But the greater the percentage of profits that a customer represents, the greater attention you should pay to that client’s financial condition. In addition, these customers have more power over you to demand price reductions.
Strategies to Minimize Collection Times
Think defensively; follow these steps to eliminate the excuses before they delay collections.
- Clearly define in writing what constitutes fulfillment of the order for goods or services.
- Agree upfront on payment terms. You might say, “Our normal payment terms are such and such, is that acceptable?”
- If significant money is involved, get a credit report; you’re a supplier, not an investor.
- Make sure you understand necessary submission procedures and required billing information to get your bill approved for payment.
- Develop a relationship with the accounts payable person working for your customer who has the power to get you paid.
Once the invoice has been sent to the customer, follow these steps.
- If it’s an important payment for you, follow up to make sure your invoice has been received and meets all requirements for authorization of payment. Don’t wait 30 days to find this out. The company won’t call you to tell you about a deficiency.
- Make the accounts payable contact your advocate by asking for their help.
- Keep a call log to follow up each conversation; the date, time, who you talked with, and what promises were made. As you continue to call, ask for the same person and let them know, as politely as possible, if they’ve broken any promises. Once you have caught them in a broken promise, you have a better chance of being the squeaky wheel that gets paid.
- Be patient and polite until, as a last resort, you need to become the really squeaky wheel that gets paid. I knew a vice president of finance who called a business owner regularly on weekends at home to discuss his financial status. He was on the top of the list to be paid to stop the nuisance calls.
- Until you have a track record with a customer, never expect to be paid on time.