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 Plaid Group Newsletter Join The Plaid Group mailing list and you’ll receive a free bimonthly email newsletter filled with insights and ideas you can use to enhance your company’s operational performance, spur growth, and increase bottom line profits. No More Overdue Receivables! Make a New Year’s resolution to get paid on time. Here’s how. by Tim Smith, Principal  [ Print Version ]Every year, people make New Year’s resolutions to eat better, exercise more and live healthier. Why shouldn’t businesses do the same? January is the perfect time to assess your company’s overall health and make the necessary changes to get “financially fit.” Believe me, it’s easier than cutting back on dessert and getting up early to jog! The first resolution that business managers should make for 2009 is a simple one: Get paid on time. Are you getting paid? In our current business climate, credit is difficult to come by and poor cash flow can sink your company. Getting paid in a timely manner is always critical to your company’s financial well-being, but even more so now. Unfortunately, it’s not uncommon for businesses to do a great job selling and delivering results, but then short-change the financial side by paying scant attention to managing receivables. If you want to get paid in full, and on time, you have to do more than just send an invoice. John Youens, a colleague of mine who has spent almost 20 years in the credit and collections world – and who currently works with large professional services firm to manage their collections efforts – believes that businesses must think of the receivables management process as a four-phase effort:
I would add only one more phase on the front end of the process – the Customer Acquisition Phase. That phase encompasses all the steps you take to target and attract new business … the steps you take to get your customer’s signature on the dotted line. Clearly, a vital attribute of a good customer includes the ability to pay, also known as credit worthiness. I wrote about the importance of customer fit in October 2008. You can read more by going to www.plaidgroup.com and finding “In Uncertain Times, Focus on the Right Customers,” in our newsletter archives. What might surprise you is that the most common obstacles that can keep you from getting paid on time are easy to discover and remove. They often result from poor execution of the basics. Now, let’s look at some of these basics in more detail. The Delivery Phase Your first step is to review and strengthen company practices and policies for extending credit to customers. If you don’t collect payment by the time your customer receives your product or service, you are tacitly extending credit. Invest the time to research your credit policies, asking yourself these questions: 
The other key component of the Delivery Phase is customer satisfaction. Study after study has shown that the customer’s overall experience is far more important than quality or price and that their overall experience is the basis for customer satisfaction. And dissatisfied customers are more likely than satisfied ones to pay late, short pay or not pay at all. Have you ever noticed how restaurant servers – before giving you the bill – ask, “How was everything today?” By addressing any concerns you had about the food or service up front, they stand a better chance of getting a decent tip. Most service businesses can employ this same concept to reveal and address any issues that might otherwise lead the customer to delay payment. If your business is project based, agreeing on payment terms up front is critical. Will you progress bill? Bill the full amount at the end of the project? Bill a specific amount every other week? Be clear up front, and check for satisfaction along the way. Keep your customers informed about any changes in the scope of the work and how those changes affect the project cost. And make sure to communicate those changes in writing so there is no confusion. Your objective is to ensure that each customer’s experience is a positive one. You can read more about this topic in The Plaid Group’s September 2006 newsletter titled “Learn to Love the Ones You're With.” The Invoice Phase The invoice itself is often at the root of payment delays. Are your invoices complete, accurate and easy for your customer to understand? Even in small companies, someone other than your actual customer probably processes your invoice, and they often have nothing to go by other than the details on a purchase order and maybe your sales quote. Be sure that the wording on your invoice matches, or is at least similar to, the wording on the PO. The easier it is for the specialist to process your invoice, the faster you’ll get paid. On the other hand, if it is difficult to make sense of your invoice, it will wind up in the dreaded “invoices to research” pile – basically a “black hole” for invoices! If your customer requires backup documentation, be sure to clarify those requirements and include the backup items with the invoice. Clearly specify all payment terms, and make certain the invoice includes a due date in a visible location. One last suggestion for the Invoice Phase: Don’t wait too long to bill! Several years ago, I had a client who was suffering from critical cash flow problems. Yet an analysis of sales data showed that they should have had ample revenue to meet their needs. Walking through the receivables management work flow, we uncovered the problem – the receivables specialist was responsible for (1) tracking down missing backup paperwork required for invoicing, (2) generating and mailing invoices, and (3) making collections calls on past-due accounts. Yet she was also the lobby receptionist ... so she handled her accounting-related duties whenever she had time (which wasn’t often!). They waited a long time to bill their customers and sometimes failed to bill at all. Make sure receivables management is a priority for your organization. Prepare your invoice soon after your customer gets what you promised, and then send it no later than 24 hours later. The Grace Period Phase There are a few critical things you can do during the grace period phase to manage your receivables. The first, and most basic, is to monitor payment. Be sure that someone is keeping an eye on your receivables so that you know which ones have been paid and which ones are past due. Second, for large invoices, contact your customer prior to the due date to be sure they received the invoice. If you offer 30-day terms, consider calling about 15 days before the invoice is due. That will have given the customer time to receive the invoice, process it and identify any problems that would keep them from paying on time. If they need a duplicate invoice, e-mail or fax it and get confirmation of their receipt. For customers with a history of slow payment, especially those who often claim not to have received the invoice, consider following up even sooner – maybe five days after you send the invoice. The Collection Phase I could write an entire newsletter on collections. But in the interest of time, I’ll just present a few key thoughts with a focus on prevention. What is most important is to make sure that someone in your organization monitors receivables and follows up on past-due invoices. Next, what constitutes a “late” invoice? In other words, what will your company consider a delinquent invoice? Two days? 15 days? 30 days? Pick one and stick to it, for every customer and every invoice. There is an old saying along the lines of “30-60-90-never,” which basically means the longer you wait to contact a customer and request payment, the less likely you are to get paid. Be sure to have written procedures for collecting past-due receivables, including steps for escalating problems that are more difficult to resolve. For some companies, the sheer volume of past-due receivables overwhelms the Collections staff. If this is the case, consider using the 80/20 rule to focus on the most important ones – the largest accounts or customers that account for about 80 percent of all past-due receivables. Finally, a few thoughts on making calls to customers. First, contact your customer early. The particulars of your customers and industry dictate what “early” is. Maybe it’s two days after the due date. Maybe a month. Regardless, don’t wait too long. When you do call, focus first on obtaining facts about why your customer has not paid you. You might discover that the customer has paid and the problem is on your end! For example, the invoice might have been created but not sent. Maybe the customer paid, but that transaction never made it into your accounting system. Or maybe your customer moved and you sent the invoice to the wrong address. Then again, your customer might be withholding payment for a reason. It is not unusual for a customer to hold payment and wait for you to call so that they can get your attention and get you to address an outstanding issue. Regardless, take a supportive, helpful and friendly approach, but don’t shy away from being direct. You have as much right to expect payment as your customer has the right to expect you to fulfill your promises in terms of product or service delivery. There is no need to beat around the bush about why you are calling. No matter what you discover, the facts you gather will make it clear what steps you should take next. Keep a record of your conversations so that you can review your notes if you have to make additional collection calls. If the customer agrees to a pay by a certain date or per a given schedule – for example, 50 percent tomorrow and 50 percent four weeks from today – follow up with an email to the customer that outlines that agreement. Learning from your collections effort One critical aspect of collections that is often overlooked is using the feedback gained from customers during the collections process to make positive changes to the way you do business. For example, one client of The Plaid Group reported that their customers routinely paid late and repeatedly complained about invoices that were “hard to decipher.” The collections group spent hours each day explaining invoices to irritated customers – something that was not pleasant to either the customers or the collections staff but the collections team didn’t have a way to feed that information to anyone who could address the problem. As part of our efforts to increase cash flow, we redesigned the invoice template using feedback from some select customers. Customers no longer had to wrestle with confusing invoices; that simple change led to a significant decrease in the number of delinquent invoices! Cash flow problem solved! What do your customers think about your invoices? How are you gathering that feedback and using it to make it easier for customers to pay? As you “get in shape” for 2009, consider ways that you can improve your collections process and improve your customers’ overall experience at the same time. Cash is king You and your employees work hard to deliver great products and services to customers. But the job isn’t done until you get paid. In business – especially today – cash is king. Remember, you can’t spend uncollected receivables, so invest the time this month to error-proof and streamline your receivables management process. It’s a New Year’s tune-up that will pay dividends for a long time. Good luck! More Information? If you’d like to learn more about managing receivables and improving cash flow, please send an E-mail to info@plaidgroup.com, visit our web site at www.plaidgroup.com, or call us at 713-627-3569. The Plaid Group publishes a free bimonthly e-mail newsletter filled with insights and ideas you can use to enhance your company's operational performance, spur growth and increase bottom-line profits. To subscribe, change your e-mail address or unsubscribe, please visit www.plaidgroup.com/newsletters_subscribe.asp. Author's Note: Tim Smith is a Principal with The Plaid Group. The Plaid Group helps companies simplify and stabilize their business operations to improve financial performance and gain a competitive edge. Copyright 2009 The Plaid Group |
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