A year or two ago, your business was probably running pretty smoothly, with sales and profits growing. And then the recession and credit crunch hit — a brutal double-whammy — and everything slowed down.
Most troubling of all, your customers, both commercial and consumer, started paying you later and later, as if they’re using your money to fill their own personal credit gap. Well, they probably are.
Most of us don’t realize how dependent we are on credit to run our businesses. When you sell your products and services on credit, you’re making interest-free loans to your customers, even if you’re financing those loans with a bank loan on which you pay interest every month.
As more and more customers put off paying you, your cash flow — the lifeblood of your business — could be in big trouble. Now’s the time to be proactive with the following five ideas.
- Improve your credit-granting practices. On the front end, screen new customers more closely before granting them credit. Spend a few dollars obtaining a credit report and a few minutes calling a couple of credit references to get a sense of the relationship they have with your potential customer. You might ask about their payment patterns when the economy slows, which might be different from when times are good. 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 that has changed suppliers more than once in the past year. If you can learn the name of their previous supplier, that’s someone you should talk to.
- Make a committed collection effort — all the time. At least one person in your company should be responsible for collections follow-up. Don’t make the mistake of giving the job to your controller to handle in their “spare” time. They likely don’t have any spare time and, besides, accounting personnel are typically not the best in customer communication. Assign the task to someone who is a good negotiator, has an amiable but firm phone personality, and understands that this is a critical job. Most important, do what you say you’re going to do. 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.
- Call customers before the payment due date. Have your collections person call the customer’s accounts payable department a few days before the payment due date “as a courtesy” to make sure everything is in order and that the check will be going out on time. This little reminder, when positioned with friendliness and a desire to help, can make a friend of the person who actually cuts the check. If your customer is lacking something they need in order to pay you, this would not be a good time to be condescending about their inefficiency. Your effort to quickly provide it could put you at the head of the line for payment.
- Offer discounts for prompt payment. 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 deal if explained to customers clearly. Consider that a 2 percent discount for paying 20 days earlier than normal amounts to an annual return of 36 percent. That’s not a bad yield for a customer whose savings account is probably earning 2 percent a year or less. 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 some organizations, like many local governments, are required by their policies to take advantage of such discounts.
- Create a “preferred customer” plan. Want to think outside the box? Consider creating a special program for “special” customers that offers services like 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. Make the conditions list beefy enough that it doesn’t look like a poorly disguised collection program.
While you can appreciate your customers’ dilemma in trying to stretch their cash, that’s not the same as agreeing to be their banker — interest-free. You can extend their payment terms, as many companies do during times like these, but in the end you still need to collect your money by a date you can plan on. Of course, you also need to avoid alienating your customers in the process.
The fact is, most suppliers will get paid late by many of their customers during tough economic times. But follow these suggestions and you can be the exception to the norm — and better positioned when the economy turns around again, as it always does.
Gene Siciliano is an author, a speaker, and financial consultant who works with chief executive officers and managers to achieve greater financial success in a changing economy. His new book, Financial Mastery for the Career Teacher, is scheduled for publication in spring 2010.