Winning Advice #4 – Collections (Getting Paid)!
If your company doesn’t have a handle on getting paid in a timely way, chances are your business will eventually fold, regardless of how great your products or services are. That was the next message; #4 of 5 on the handwritten outline, thoughtfully drafted by a senior peer of mine at a time when failure was not an option. It would have meant bankruptcy, not only for my business, but personal bankruptcy as well. That proved to be strong motivation to follow this wise counsel.
The first three pieces of this business puzzle focused on #1 employees, #2 customers, and #3 knowing your margins. But #4 “Collections”; was all about getting paid in a timely way and not setting yourself up for a cash crunch. This was about Accounts Receivable. You know….the work you have done but haven’t been paid for. Or to put it another way, the money that is now yours, but your customer still has it in their bank account. Yes, that money, that’s what Winning Advice #4 focused on.
As the three that preceded it, the words were limited, but the importance was significant. Word-for-word it read like this…
A. Rent advance
B. Machines as delivered
C. Call-Call-When can we expect payment
D. Adjust Credits limits often
Do you want to improve “Your Collections”?
Rent Advance (payment). Even if your company doesn’t rent equipment, every business is selling something. The message in this: Focus on getting paid in advance or at the point-of-sale if at all possible. If your product or service requires setup time or preparation before delivery, consider implementing at least a partial payment in advance. Today it is easier than ever to use technology to shorten this payment cycle. Are you using it? This means having invoices prepared when the product or service is delivered; that can be a shift in procedures for a lot of companies. Although this may not be possible for all your business transactions, think about where you can get paid in advance and start there.
Machines as delivered. Maybe you have widgets or provide a service. This one is about documenting what you sell and getting paid for what you provided at the time they take possession of it. If a customer orders an additional program, adds an option, wants to make changes other than what was originally agreed upon, keep those issues separate. Get paid for what your client has already received and don’t allow a small change to delay payment on a large invoice.
Call-Call-When Can Expect Payment. For those accounts that are extended terms or a credit line, you should have a plan or process to follow to get paid. There is a lot of truth in the saying The Squeaky Wheel Gets the Grease. So call…and call regularly. Your accounts receivable department should have a process that includes getting actual dates to expect payment. The other side of this is you must get invoices out as soon as the product is delivered or shipped; you can’t call and demand payment when the client doesn’t even have the invoice in their procession. Remember if you haven’t been paid and your client has your widget, they have your money in their bank account.
Adjust Credit Limits Often. This only applies to accounts that have credit lines. But for those that do have credit limits don’t neglect to monitor and adjust the limits. There is no reason to give someone a $10,000 limit if they never spend more $1,000/mo. Another suggestion to protect yourself on open accounts is to be clear on who can and can’t authorize purchases from your business. Some companies will provide a list of approved names if you simply ask. Clarify if purchase orders are needed; there is nothing more frustrating than to be told you aren’t getting paid for something that was purchased on a line of credit by someone who was not authorized to buy it and you have no PO or signature to back it up.
The bottom line is poor management of accounts receivable is one of the biggest areas businesses get themselves in trouble. Unfortunately, the faster your business is growing the more critical it is to manage your “collections”, because your expenses are typically growing with your business. So how are your collections? When was the last time you tried to shave 5 days off your outstanding accounts receivable average?
As always, if you have any suggestions you would want to add to this list, please feel free to comment in the space below.
Chris Steinlage Kansas City Business Coach