Reign In Your Receivables.

[Paul B. 523]

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This month there is an article on tips for tactful techniques on collecting receivables titled "Reign in Your Receivables". I thought was it was agreat article and may be useful for some of the folks here. I've copied it below and posted a link below:

Reign in Your Receivables

Even the most successful company can run into a cash-flow crunch when customers don't pay on time. So how can you cut down on payment cycles without fear of alienating or upsetting your key clients? While there are several tried and true practices for cutting down your receivables, sometimes it's best just to use your imagination. Here are some methods small business CEOs are using to get paid on time.

Plan ahead to collect on time

• Match billings to customers' payable cycles. Call each slow payer and ask how long it typically takes the company to process a bill and mail a check. Then make it clear that you expect to be paid within that period. If customers don't pay when they say they will, call them within three business days and ask when you can expect the check. If the answer is, "It's in the mail," ask for the check number and date it was mailed. While this tactic may annoy some customers, experience shows that it's unlikely to cost you the business.

• Stay consistent. "The language on the invoice should match the language on the contract the customer signed," says Tracy Wald, chief financial officer at Seattle consultancy Leonhardt:Fitch. That way there's no excuse for customers to claim confusion over what exactly they are being billed for. That is especially important if you sell an unquantifiable service like branding, as Wald does.

• Work off milestones, not months. Avoid billing monthly if you can. It's far better, says Wald, to tie your billing milestones to tangible deliverables. For example: At some point during a project, you and your team give a major presentation to a client. Don't wait until the end of the month to bill for it. Instead, use the presentation date as a milestone in your billing cycle.

• Don't let last be least. The most difficult check to collect is often the last one, since that's when the job is complete and your negotiating power is reduced. So Richard Larkin, CEO of staffing company Larkin Enterprises in Bangor, Maine, is careful about when he mails out his final invoice. He plans for it to arrive while his workers are still at a job site. If his customers take too long to pay, Larkin still has the option of pulling his workers off the job before they complete it.

• Put your faith in plastic. Ron Simkins, CEO of LexJet, says asking customers to use credit cards for their purchases has made all the difference to his company, a direct marketer of printing materials in Sarasota, Fla. He says 90% of his customers -- including Whirlpool and Kinko's -- have opted to pay with plastic for fees ranging from $100 to $100,000 annually.

Simkins for one is convinced that big companies are moving "in droves" to plastic to reduce the administrative expense of dealing with small vendors. "Corporate credit cards are not a new thing; what's new is the use of cards to mitigate the cost of purchase orders." What the trend means to LexJet is simple: the company gets its money literally overnight. What's more, there are no invoices to track down and no more frantic calls to make to customers' accounts-payable departments.

What's in it for the customer?

With no purchase orders to process, the cost of bringing on a new vendor is greatly reduced. But as is the case with invoices, the customer still has 30 days to pay. Finally, if the company isn't satisfied with the purchase, it's a simple matter for the vendor to call the credit-card company and ask that the charge be removed. At least that's the argument that Simkins makes to all his customers. "We teach them how to do it and why to do it," he says.

Simkins insists he's no shill for the credit-card companies, though. He says there's nothing in it for him personally other than better cash flow for his $10-million company. Of course, there's a cost for that convenience. The credit-card company charges a fee of 2% to 3% of the purchase, a small price to pay, he argues. "Our cash flow is worth more than that on the float." Still, to some company owners, such fees smack of factoring, but Simkins says he'd rather get 97% of his money now than wait 30, 60, or 90 days to get it all.

Employ good collection strategies

• Charge interest. Do what banks and other creditors do -- assess a service fee. Include this standard notice on all invoices: Overdue accounts will accrue a 1.5% monthly service charge.

Foresight, a 50-employee software company in Dublin, Ohio, sends customers invoices that include the following phrase: "If paid by September 30, your cost is x; if paid after September 30, your cost is y (invoice amount plus interest)." Nettie Morrison, Foresight's receivable specialist, found that specifying what the amount of interest would be -- as opposed to merely stating that 1.5% of the charges would be appended every month -- made a huge difference in how quickly customers paid up.

• Use phone etiquette. Morrison has also mastered the art of phone empathy. "I say to them, 'I know they're not paying you to chase around invoices,' or something to that effect," she says. Showing that you understand where people are coming from helps to mollify them and possibly even win them over as an ally.

But when you do have someone on the phone, always try to get a specific date by which you'll get paid. Answers like "soon" or "next week" aren't actionable. If the customer avoids specifying an exact date, be prepared to calmly explain to them what you plan to do if you don't get paid on time. While you shouldn't be threatening, make sure your remind customers that they signed a contract. "Use statements like 'you expect us to ship on time, so we expect you to pay on time,'" says Richard Kadet, a veteran CFO who works for the Brenner Group, a San Francisco Bay Area-based consultancy. "You must create an expectation within their A/P department that you will call and insist on payment within the contract terms."

• Keep a journal. Take detailed notes of every collection conversation that you have. Record the date of the conversation, who you spoke to, the commitment made to you, and the end result of the call.

• Don't get emotional."You have to be dispassionate about it," advises Cullen G. Williams, CFO of Larkin Enterprises. "Don't make it personal. Be very bland. Use simple, non-threatening sentences." During collection conversations, Williams tries to make it very clear that he'll do "whatever was reasonable to comply with the customer's requests," which meant, in some cases, supplying backup documentation "10 times over," he says.

• Use guilt, not anger. To achieve your aim -- getting paid -- it's important to get the names of all the people you've talked to, especially if they've made a commitment. "Once you get that commitment, whoever you talk to will feel guilty when you call back," says Wald. "They've made a promise, and I've found that they'll do what they can because they don't want to be thought of as someone with no integrity. It could be the owner, a clerk, anyone." What's the proper way to react if your contact lies to you? With disappointment, rather than anger. "It's just a sigh, mostly," says Wald. "Then I say, 'I told my boss you guys were going to pay, and now I'm going to look like an idiot.' And after saying something like that, rather than getting angry with them, I ask for their help."

• Pay attention to the marketplace. Morrison monitors the business press not only to stay alert about potential mergers (and bankruptcies) among her company's customer base, but also to have an excuse to pick up the phone and talk with a client. For example: A client might be in the news because it's introducing a new product or having a strong earnings quarter. Morrison calls to congratulate the customer and winds up shooting the breeze, and as a result she develops better relationships with her contacts.

• Collect in person. If you offer a discount -- say, 2% net 10 -- for prompt payment, how can you prevent customers from abusing it? Call them and offer the lower price, provided you can send someone over to pick up the check within 10 days. When you do visit, make sure that you bring documentation to support exactly what the customer owes you. The last thing you want on a collection call is a dispute over the amount of the bill.

• Recoup the discount. Giving up 1% to 2% of your receivables can add up. When customers take the discount but pay past the due date, charge the difference on their next invoice. Again, experience shows that most of them will just ante up.

• Don't hesitate to negotiate. Your company needs cash, but your customer does too. Is there a middle ground where you can meet? Negotiating a payment schedule is one idea. It doesn't have to be anything fancy; you can ask a late-paying customer to commit to giving half now and the rest the following week. Seeking a smaller amount may make it easier for an accounts-payable employee to cut you a check. And partial payment today is better than no payment tomorrow.

• Ask for the oldest first. If a customer owes you for more than one invoice, you should always start by looking to collect on only the oldest invoice. "Asking for them all at once can seem too insurmountable," he says. And the collecting "tends to get easier once you've gotten the oldest one." Plus, he adds, by asking for payment on only the oldest invoice, you are subtly currying goodwill with the customer, who'll appreciate your leniency in not demanding the entire debt.

• When necessary, revoke privileges. Rolf Albers of Albers Manufacturing Co. has been in business for 23 years, yet one thing still baffles him. "If I went to a department store today and wanted to buy a refrigerator, they would make me pay today, in one form or another," he says. "But a small manufacturer with no track record can call me, wanting $1,000 worth of equipment, and they think that they can wait 90 days to pay. It's a stupid system, but that's the way it is," exclaims Albers. So he does his best to prevent customers from taking advantage of "the system." If customers get too far behind on payments, Albers converts them to COD status.

Link to article: www.hp.com/sbso/advice/articles_inc9.html

[timhays 14]

I have read this article before and it is very valuable.

one of the things that is so sad is the fact that so many vendors are in competition of business that ACCOUNTS can have ther way with terms,there are tons of accounts out there who pay within 7 days and on time every time,all of the accounts that i have dealt with on 30 day terms usually take 45 days to pay.

it is now our policy to suspend service to accounts who have 3 late payments on 30 day terms.

if you get involved in this cycle of chasing collections it can be viscious,and detrimental to your companies financial health.

[timhays 14]

Thank you Paul for all your wisdom on this and other topics,we choose to weed out the slow payers than settle for the interest which is meanial.

if a payer is slow,they will always be slow,its not worth 8 percent a month to carry there balance.

[Paul B. 523]

Tim,

Sounds like a good choice. Charging interest only works if it motivates. There are large companies that understand the meaning of paying on time and taking advantage of a 2% discount on quick payment. That 2% for these companies means 100's of thousands per year. The rest are nickel and dime contracts (so to speak).

[Henry B. 4]

I've recently signed up with a national collection company to track down some cleints that moved without paying for their services. Now this doesn't happen often but it ticks me off to see people basically steal from me like this. If anyone is interested in checking this out let me know on this thread. The fees run $9-$15 per account I refer to them instead of the usual 50-60%.