Many companies assume their customers purposely delay payments – as a strategy to manage cash, or because that is what large companies do, or perhaps because they are flat out dysfunctional. There are plenty of examples of all three, but in my experience, when customers are not paying, it’s a good idea to look inside your own organization first.
I was once involved in an acquisition of a fast-growing technology company that was burning through piles of cash and had several million dollars past due receivables. Most of their customers were Fortune 500 sized companies. Deadbeats? Hardly. Nearly all of this technology company’s cash flow problems could be traced back to internal issues.
Here are 7 things to check before you slap the deadbeat label on your customer.
- Order Management Practices – The temptation to overpromise delivery times, the drive to hit financial targets, or the focus on maximizing incentive compensation plans can drive organizations to bend their order acceptance policies. This can result in shipping products or rendering services before complete order information is gathered. Tighten your order management processes to ensure:
- Correct billing address is captured at the time of order rather than after your invoice has been issued to the wrong location
- Orders are not accepted and acted upon until the customer has issued a valid purchase order
- Complete product numbers, pricing and payment terms are captured in your systems prior to releasing the order to operations
- Produce invoices that match purchase orders or contracts. Almost all organizations use some form of purchase order system, and all large companies do. In fact, in a larger organization, often the person who purchases your goods and services has never met the person who processes your invoice for payment. Failing to capture the customer’s order number and the precise line items and descriptions on the invoice is a recipe for a long wait. Your customers’ administrative and clerical staffs have been trimmed to the bare minimum, and when invoices fail to match the information in their systems, they are set aside to be worked later. Make it easy for the accounts payable agent to pay your bill.
- Understand How Your Significant Customers Pay Bills. You will save yourself a lot of time and money if you determine how your top 5 customers process your invoices. Ask your best contact at the customer the following questions and then confirm the answers with their accounts payable department:
- Where should invoices go first?
- How do invoices get approved and by whom?
- At what point in the process can a payment date can be confirmed?
- Slow Invoicing. Sloppy and infrequent invoicing practices are an invitation for late payments, especially if you sell primarily services. Customers’ memories get foggy as time passes and they forget the value you created for them and the urgency you placed on their work. If the answer to any of the following questions is “Yes,” take the time to fix it.
- Do days or weeks go by between shipment of goods or completion of services and invoicing to customers because everyone is “too busy to stop and do paperwork”?
- Are all invoices prepared at the end of the month because “that’s the way we’ve always done it?”
- Does project invoicing only occur at the end of the project because “we are afraid we would lose the deal if we suggested progress payments”?
- Set Expectations. Payment terms are an important part of your pricing strategy. Make sure your proposals and contracts clearly state your payment terms and then bring them to the customer’s attention during the sales process. The collection process will go much more smoothly if you have discussed up front that you expect to be paid on time within 30 days from the invoice date. Avoid sending invoices with payment terms of “Due Upon Receipt.” As a CFO, I always considered this an unreasonable tactic and assigned at least 30 day terms to these accounts. If you want to get paid in 10 days, then it is imperative that you disclose this fact up front and get the customer’s agreement that that these terms are an integral part of the price of your goods and services.
- Establish Relationships. Encourage your billing and collection staff to establish relationships with their counterparts at the customer’s business. All too often, the account executive or the professional who developed the account is paranoid about anyone else speaking to the customer. Get over it. If your staff is friendly and helpful to the customer’s accounts payable agent, then your invoices will likely make their way to the payment queue in a reasonable time. Or even better, that agent may be able to help get your invoices paid when other vendors have to wait.
- Failure to be the squeaky wheel. You must have a policy to pursue past due invoices and then follow it. Some firms never call their customers about payment until the invoice has reached elderly status. By then, it will be a really hard (and potentially embarrassing) conversation. Collection calls do not have to be confrontational. If the proper understanding has been reached up front, and relationships have been established, and every effort has been made provide an accurate and timely invoice, there should be no apprehension about calling a few days after the due date to make sure that payment will be on the way soon. In that regard, one of the most powerful tools to use when checking on a past due invoice is to ask for the check date. For most customers, once a commitment has been made, it is usually kept.
Of course, some customers are going to slow pay. They may have cash flow problems, are dysfunctional, or simply do not have the integrity to keep their commitments. But by following the suggestions above, your ability to accelerate customer payments will likely improve.