Dealing with late payers

• Revenue is vanity....margin is sanity....cash is king. (Unknown)
• Profit is an illusion, cash flow is fact. (Unknown)
• Profits are an opinion, cash is a fact. (Unknown)

The above quotations were given to me some years ago by different clients in businesses who were small business owners. These businesses had suffered hugely due to late payers and both businesses nearly went into insolvency. Thanks to the right kind of action taken at the right time, both businesses survived. I want to share some examples from their experiences which will help you deal with late payers in your own business.

  • Small businesses are often flattered when they get awarded new sales from big businesses or well known ‘brand’ names. The assumption is that the bigger the customer then the more reliable they will be for payment and the bad debt risk is reduced. This is not always the case.
  • Here’s an example; Business ‘A’. Small family owned business in the Electrical Contracting Sector. Managed to get on a large firms tender list and won new sales. Turnover looked great as did profit margins. The company was growing fast.
  • Despite have strong accounting records and accounting controls (SAGE had been used well for a number of years and the aged debtors report was updated daily) the new customer was slow in paying. Often 90-120 days settlement period was common. The customer would then pay ‘on account’ and ‘what it wanted to’ with little regard for invoices raised.
  • In the meantime, Business ‘A’ had increased its payroll cost to service the new turnover. It was also funding materials to service the new sales and these had to be paid for in normal 30 day credit terms or deliveries would be stopped.
  • Before long Business ‘A’ was exceeding its overdraft facility with the bank, losing trade discounts and credit terms with suppliers and struggling to pay its VAT and PAYE liabilities ongoing.
  • The following solutions were put in place and it took 6 months for Business A to trade through the cash flow problem. The directors had to inject their own personal monies to bridge the funding gap.
  • A full time credit controller was appointed.
  • The Aged Debtors report was updated daily and customers e-mailed, telephoned and even visited personally to ensure promises about payment were kept.
  • The Directors met with the larger customers accounts managers and agreed new terms in writing. For a small early settlement discount the larger customer (most but not all) agreed to pay within 30 days of invoice.
  • Business ‘ A’ then tightened up its own internal control systems to ensure invoices were raised promptly, proper references were printed on those invoices together with details of who approved the payment of that invoice at the customer’s end. This made sure the invoice got to the right person and there was an easy way to follow it up with a point of contact.
  • Business ‘A’ ultimately decided not to do business with those larger firms who continued to be slow payers over 90 days. The reduction in turnover and profit was deemed preferable to being at risk of ceasing to trade due to lack of cash.
  • Once you are dealing with larger firms and they make up a significant proportion of turnover- remember the Pareto 80/20Principle - 20% of your customers account for 80% of your turnover- it is difficult to manage your way out of changing your sales mix and customer base. Often it is the larger firms that are the only customers in the market.
  • Business ‘A’ in this example would urge every small business to focus as much attention on debtors’ management and cash flow as well as winning new turnover.
  • Improve your own accounting systems and controls. Ensure your data is accurate and kept up to date.
  • Ensure there is NEVER an issue over the quality of your product or work. Don’t give a customer an excuse not to pay.
  • Have a policy whereby all customer complaints are dealt with immediately- else they will have the perfect excuse not to pay.
  • Set cash collection targets and share them with your staff- consider rewards for exceeding targets. This will get your team working with you.
  • Great credit controllers create telephone relationships with customers and their accounts payable departments. They are comfortable with calling daily if necessary and talk with a smile in their voice. They follow up with calls to ensure customers keep their word and call to say ‘thank you’ when invoices are paid on time and as agreed.
  • Early settlements discounts can work in some cases- but beware customers don’t end up taking the discount and still paying late!
  • Be very clear from the outset and have this in writing, about what you are selling/providing, what the price will be and when the invoice will be raised and due for payment. Accountants themselves call this a ‘Fixed Priced Agreement’ which their clients.
  • If your line of business allows, consider talking to customers about paying a regular monthly amount on account or by standing order. This will help their cash flow too. Reconcile every quarter at least.
  • Put clients or customers on ‘STOP’ if they do not pay. Why continue to deal with a customer if they haven’t paid for what they have already received.
  • Ask yourself and the customer; Can a direct debit be set up to settle invoices when due? Offer the customer an incentive to do this- preferential rates, terms, discounts etc.
  • Have a good solicitor on hand! Have clear and consistent policies about at what stage will the customer receive a ‘7 day notice before legal proceedings’ and then act on your threat every time. Be consistent. As long as you have given the customer every opportunity to pay then it is their problem and not yours if legal proceedings are started.
  • Often it is a case ‘he who shouts loudest goes to the top of the list.’ Make sure you are up there!
  • Be consistent and persistent-that’s the golden rule.....

Finola McManus-Practice Perfect

Helping accountancy firms to make their clients successful
www.practice-perfect.net

 

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