Hotshot Connect Forum :: Getting Paid

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A receivables expert tells how much your company stands to gain when your customers pay up fast.

"Companies don't always grasp the importance of faster collection of outstanding receivables," notes Les Kirschbaum, president of Mid-Continent Agencies, an accounts-receivable-management business in Rolling Meadows, Ill. Instead, managers focus corporate resources on boosting sales, because the benefits of higher revenues are easier to quantify. Collection inefficiencies or problems are often ignored by executives who don't know how to assess their cost to the company's bottom line. "But it's possible to quantify the benefit of faster collection in terms of dollars saved," says Kirschbaum. Here's how to do it: by following the formula below, you can calculate the dollar savings from each day's improvement in the speed of your average accounts-receivable collection. Faster collection means that your company won't have to use its credit line (or your own credit cards, for that matter) while waiting for customers to pay up.

Post the formula on your company's bulletin board so that no one -- least of all you -- can overlook the benefit of a swift, efficient collection system. Once you know exactly how much your company stands to gain from faster collection, you can see if it's worth investing in top-notch collection software, say, or even hiring a full-time accounts-receivable clerk. When looking for ways to collect receivables faster, take note of every possible source of improvement. "Many executives assume that the only way to boost collection is by hounding their customers more often. But they can save days in a lot of different ways," notes Kirschbaum. "You can often improve collection just by changing your terms and conditions of payment. So remember that you've got a range of options, all of which can have a positive impact."

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Managing

A checklist of potential trouble spots that seasoned CEOs

Still, opportunities aside, if you're going to thrive on uncertainty, you have to try to manage risks that could blindside you. Some of those dangers are obvious. For example, this is not the time to be short on cash or to be on shaky ground with your financiers.

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Can you diversify your customer base?
One key recession-fighting technique Yantis Co. has learned over the years is customer diversification. The company maintains a mix of public- and private-sector work -- on the theory that government work tends to be low margin yet pretty recession-proof. During the boom years of the late 1990s, the public-sector work that Yantis Co. did dropped at times to as low as 10% of total sales, Yantis says. By the fall of 2001, the company's public-sector-work backlog was close to 35%.

Do you need to vary your supplier mix?
Palmer Reynolds, owner and CEO of Phoenix Textile Corp., a company based in St. Louis that provides textiles and design services to the health-care industry, is keeping a close eye on her sources of supply -- many textiles are now manufactured in Pakistan, India, and Bangladesh. "You have to be aware. You have to be smart. You have to make sure that you have many areas of procurement," says Reynolds, whose company expected sales of about $50 million for the fiscal year that ended October 31.

Could changes in fuel and transportation costs have an impact on your business?
Another area that affects Reynolds, whose products are distributed by truck, is rising fuel costs. "I paid $65,000 more in fuel charges" this past year, she says.

How dependent is your business on the movement of goods across international borders?
Kappler Safety Group Inc., a manufacturer of protective clothing in Guntersville, Ala., projects 2001 revenues of about $100 million. In the wake of the tragedy of September 11, "we're going to see some fairly aggressive buying" of high-end protective gear, says Mike Willis, chief operating officer for the company. But with 80% of the company's revenues involving some international aspect, such as product assembly in another country, Willis is now wondering how heightened security -- and thus delays -- at U.S. borders may affect Kappler's production and therefore its cash flow.

If exchange rates fluctuate greatly, how will that affect your company?
Rick Heiniger, CEO and founder of RHS Inc., an $18-million maker of specialized agricultural-equipment accessories, says about 30% of his company's sales are made to foreign customers; Australia and Canada are RHS's biggest markets. Heiniger, whose company is based in Hiawatha, Kans., keeps close tabs on exchange rates, which have an impact on his business in two ways: if the dollar rises or falls, his company's overseas sales are affected -- as are the sales of his domestic customers who export.

What do your sales patterns and marketing response rates reveal?
In any consumer business, consumer confidence is an important indicator to watch. Owades says that there are several key variables to track in a direct-marketing company: average order size, purchase frequency, and response rate to E-mail-marketing or direct-mail initiatives. "Be very sensitive to all of those numbers," Owades advises. If any of them are declining, she notes, a smart company adjusts its expenses accordingly, while also thinking up creative promotions to bring in business, even if it's at lower margins.

Martha E. Mangelsdorf is a freelance business writer and editor.

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This brings us to your internal accounting procedures and how theyaffect your accounts receivable plan. The rule here is simple: keepyour side of the street clean. Here's how:

Set billing standards. Do not expect your client to pay anincorrect invoice, or to pay the invoice on time if it is sent outlate. Hold yourself to an invoicing standard calling for no errors andconsistently punctual delivery, allowing ample time for your clientsto meet your agreed-upon payment terms.
Set accounting standards. What is the best way to ensure accurateand timely invoicing? Consider the method you now use for billingyour clients. The off-the-shelf accounting package you probably usedto start your business was fine, but as yourbusiness expands, so does your need for an automated accountingsystem. In anticipating growth and change in your business, look foran accounting system that provides features such as automatic updatingof customer and inventory balances and flexibility for modificationsas your business evolves.

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Having involved yourself in setting the payment agenda, distanced yourself from the billing process, and put your internal systems in order, the final step is collecting from slow-paying or nonpaying clients. This involves an especially delicate walkand an artfully nuanced talk. Consider these steps:

Use late-payment fees. While it is almost impossible tocollect late-payment fees in a commercial business relationship, youmight use them as a tool that brings a collection problem to light. Ifyou do, be consistent about when you add them. When negotiatingfor payment, you can then say, "If you overnight your payment tous, we will remove all or part of the finance charges" that will occurafter 60 days. Do not book these fees as revenue, and don'texpect them to be paid. Forcing this issue sends a client toyour competitor.
Bring payment issues to a head. For really stubborn payers, itmay be necessary to confront the problem directly. The best time to dothis is at the most critical stage of the client's project. In thepast, we have often asked clients to put themselves in our shoes. Wehave a payroll, other clients are paying as agreed, and we must keepthe business running. We also make it clear that a delay in paying usis forcing us to stop work on the project so that our business cansurvive. We explain that if all clients were like this, we would beout of business. This sends a very clear message.
Consider arbitration. When it comes to legal action, only thelawyers make out in most cases. Therefore, we prefer to call forarbitration when an agreement or contract is disputed. This is lesscostly for both parties, and allows issues to be resolved faster.Always warn the client that he is forcing you "to bring in a thirdorganization or person" to assist in resolving the payment issue.
Stay calm, be fair. Businesspeople respect other businesspeople who are fair, so treat clients as you would expect to betreated. Stay calm at all times, repeat options verbally and inwriting, and consider compromise. I have told many clients, "Pay usnow, or pay us later. We will write a credit for this issue, but itwill cause us to consider our pricing much more carefully." Mostclients who want to do business with you would rather keep you happy -- and paid.

There's no time like the present to implement a new approach togetting paid on time. The incentives are obvious, and the necessarystart-up time is minimal. The plan outlined above is remarkablysimple, but requires consistency and follow-through on your part.You will be amazed at how quickly you see positive results.

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Collecting payment from clients is a matter of negotiating terms in advance, separating collection and business functions, and keeping internal accounting systems in order.

Very few entrepreneurs begin their business ventures with the goal ofbecoming collection agents. Unfortunately, some of us have foundourselves in this unwelcome and unsavory role as a matter of businesssurvival. Developing a consistently successful accounts receivablesprogram does not have to be daunting. By following somestraightforward, time-tested guidelines, you can implement a "win-win"strategy that gets your invoices paid on time and allows you tomaintain positive, long-term business relationships with clients. Whatfollows is a discussion of how to walk the walk, and talk the talk, ofcollection.

Money Talks, and So Must You
Why do some business owners seldom, if ever, voice complaints aboutpast-due balances, while others spend significant time on thisproblem? Much of the answer begins long before an invoice is sent.Indeed, one of the most valuable changes you can make in youraccounts receivable process is to define payment expectations withyour clients in advance of services performed. You can also enter intoa formal agreement that includes a sum to be paid up front, and thenverbally review what you will do for the clients. Here's how:

Establish financial boundaries. Discuss money during your firstmeeting with a client. Explain in a clear and concise manner exactlywhat you will do for the client, while clearly stating yourcompensation terms. Discuss in detail, for example, the cost of avisit to the client's site or two rounds of revisions on a project.Your clear communication during this meeting is essential because itestablishes important financial boundaries with the client.
Formalize an agreement. The boundaries discussed at the initialmeeting should then be documented in writing. In an obligatingagreement, you should list the specific services to be performed orwork to be delivered and the estimated cost of the services or work.This agreement should explicitly state that your client owes you moneyfor work performed or services rendered. The agreement should alsospecify the terms of payment, including the payment you expect inadvance of services.
Request money in advance. If it is the accepted practice within theindustry, business owners should request a portion of their money inadvance. In its professional services business, SBT requires allclients, large and small, to pay a retainer that lasts across the life the job.Using the terminology of the industry is important, such as "deposit onhard goods" or "retainer on services." This allows the client tounderstand you are asking for something others will ask for as well.
In one case, we at SBT asked an international freight company with worldwide offices for adown payment of one-third. The freight company balked, but weinsisted. Even if we came down to 1% from our originalrequest, we would be able to say to other clients that we requiredthis internationally known corporation to pay a portion in advance.Remember, you can acquiesce if the client protests -- the freight companyunderstood our position. But if you allow no up-frontpayment, you will have a much harder time later with other clients, andyour cash flow is affected significantly.

Review verbally. Take the time to review the agreement with yourclient before signing. This will enable you to reinforce the financialobligation that the agreement specifies. You can also use this verbalreview time to inform your client about the value of your work. Thetalk might go something like this: "By adding these modifications toyour system, you'll be able to process incoming orders inapproximately half the time it's now taking." Simply stated, you aretelling the client exactly what you are providing for a specificdollar amount, and therefore defining the client's expectations. Thereshould be no question at the end of your meeting about what is beingdelivered, when to expect it, and how much it will cost.