Debtors giving you problems? Let me walk you through the three steps of cleaning up your act.
Collecting money owed to you by your customers must be approached in exactly the same professional manner as when you made the sale. There are three basic steps. I’ll lead.
Step 1: Sales attitude. Undoubtedly, you have spent significant time and effort in designing and developing a professional sales system. From the moment you began to court a new prospect to the day the first sale is made, you ensured your prospect knew that you delivered on your promises – to call back when you said, to send the information and samples you promised, to quote by a particular date and so on.
So why not instil this same level of professionalism into collecting money promised to you by your customers? After all, this is just the final stage of the sales cycle: payment.
Review your people. Are your receivables team (debtors) as well trained and as professional as your sales team? Do they meet and share experiences? Do they communicate? Remember, collection is part of the sales cycle and should be part of the sales conversation right from the beginning. Poor collection techniques and behaviours can also lose you good customers.
Step 2: Strategy. How long since you stood back and reviewed your credit sales strategy? What might have been appropriate or expected by customers in days gone by is often different in today’s business world. And things keep changing. Look at Harvey Norman, for example, with their extended payment plans. Previously, most department stores would have offered credit accounts to suitable customers as a way of inducing extra sales. Not now; much better to credit shift and let someone else carry the burden.
So move those sacred cows to the back paddock and re-think your whole strategy, starting from the sobering reality that each time you make a credit sale, it is costing you real money to fund the time taken for the outstanding cash to get into your bank account. The longer it takes, the more it costs. Any opportunity you have to (a) get the cash in faster or (b) shift the credit provision burden to others should be investigated in detail.
(a) Getting the cash in faster includes encouraging more cash sales, customers paying all or part in advance, progress payment arrangements and the like. A classic example of this was in our own Accounting Comes Alive training business. The typical industry model was to run the workshop and then invoice the client and then collect the cash – a four to eight week collection period. But, strangely, in the conferencing/seminar industry it was always “pay in advance”. We introduced the “pay in advance” model for our workshops, wove it into our sales process and it has been brilliant. The clients are happy and we are very happy.
Another less common method involves “selling” your credit sales invoices to a factoring agent. They pay you the invoice amount less a healthy discount for their trouble. The upside is that you get the cash immediately, which is great for your cash flow. The downside, apart from the cost, is that you need to handle the collection process carefully as your customers may be put off if a professional collector starts contacting them. Also, if the factoring agency cannot collect on an invoice reasonably quickly, they will hand it back to you for collection and you will give them a refund on that invoice – so you still carry the risk of default. And finally, if you switch back you may experience a severe short-term cash crunch.
(b) Perhaps the most common example of shifting the credit burden to others is allowing customers to pay using a credit card. Sure, you pay a commission to the credit card provider but you get the cash in for the sale almost immediately. Another example is allowing the customer to pay off the item over a period (eg, no deposit and no interest for 48 months). By shifting this loan arrangement to a specialist credit provider you get the cash in immediately, at a price.
You must also review your credit terms. How confident are you of the nexus between sales and the provision of credit? Where is the point that you think you might lose good sales if you tightened your credit terms? Computerised accounting systems these days are very capable of managing shorter credit terms. But a big beware here: those computer generated reminders are all but a waste of time. As soon as an account is overdue, make personal contact with the customer – preferably by telephone with email confirmation of arrangements. Let them know (subtly) that you are on to it and that you are not going away.
One thing you may have to seriously consider here, depending on your customer profile, is that the bigger companies and government departments are often the most difficult to deal with. They know only too well that every day they can stretch your credit terms, is another day that you have helped fund their business, for free. But potentially worse than that, the bigger companies can create a defensive wall around their payables team (creditors) so you can’t actually get to talk to anyone that can help. And contacting your customer contact (the buyer) won’t bring any joy as their payments are handled in a different department.
Kim de la Villefromoy, an Australian expatriate and executive vice president at industry leader (manufacturer) Chef Revival USA Inc, says that initially this can be a bit disconcerting. He goes on: “But you know what? You just be professional about it. You learn their systems, read their QA manual, and then comply with it 100%. If you do that, they will pay.”
If you have a policy of freezing credit on overdue accounts, please ensure that this is transparent to the client right from the start – before they become “frozen”. Computer-generated notices can be offensive. Make sure all of the people involved from your side are in the loop to keep the human ‘sales professional’ element in all of your systems.
When considering enticements such as a discount for cash at the sale point or discounts for early payment of the invoice, please ensure that you do the sums carefully. I have seen well-meaning clients giving back a substantial portion of their profit margin when doing this – not good business. Know your numbers!
Step 3: Systems. How long is it since you have walked through your sales process end-to-end? That is, from the courtship of a new prospect all the way through the sale and to the collection of the money. Why not do it soon? And while you’re at it, involve all of the affected employees so you can get first-hand information on what is and isn’t working and then jointly work on the solutions. It wouldn’t hurt to get some feedback from your customers too, even the difficult ones. Engaging the hearts and minds of employees and customers is not just a saying, it works.
It’s obvious that your accounting system must provide up-to-date and accurate information so you can professionally follow up your debtors. Chasing up a customer who has already paid is a pain for them and a waste of time for you. Critically review the timing of all steps in the process. The goal must be to reduce the amount of days, on average, that it takes to turn a credit sale into cash in your bank. For most businesses this is a critical KPI.
Any of your customers that may be inclined to be a slow-payer will sense if your systems are not spot on, and they will then find plenty of wriggle room to stretch out their payments.
Why not use your contact management system for following up your debtors? After all, it helps you turn a lead into a prospect and then into a customer. So why not use it to also keep track of overdue accounts: follow-ups you have made; their promises and commitments; and then follow them up immediately should they deviate. Once they sense that you are on to them, they will more than likely look for another supplier to use their delaying tactics on.
To read more Mark Robilliard blogs, click here.
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