This article was written by Mike Capsuto, SCORE Orange County Business Mentor
Obtaining payments from customers is a major problem for companies that rely heavily on accounts receivable. A customer may be experiencing a cash flow problem and purposely delaying payments. Cash is the heart of any business. Accelerating cash collections can help speed payments to your suppliers, which may lower or eliminate interest payments on your payables and increase your credit rating. A majority of businesses reported receiving late payments from their customers or no payments at all. In addition, some businesses in their early stages of development partially stock their inventory, but never open their doors. Fraud has been committed on unsuspecting businesses anxious to make a sale without minimally investigating the buyer. Here are some tips to keep your cash flow flowing.
Make sure you are not dealing with a ghost.
• If possible, visit your customer's place of business.
• Checkout the company with the local Better Business Bureau.
• Use the Ripoff Report website (www.ripoffreport.com) to determine if the company has committed fraud in the past.
• Use apps such as Google Maps or Google Earth to ensure that the maps conform to their address.
• Verify that the business is not a transient location such as an apartment building, motel or vacant lot especially if the “bill to” and “ship to” addresses are different.
Caution: Do not rely on a company having a web site. A web site does not ensure legitimacy. Anyone can put up a web site.
Obtain a credit report.
• Obtaining credit reports for potential customers can reduce nonpayments and increase your cash flow.
• Before entering into any agreement with a customer, verify their credit status to ensure that they have a track record of paying their bills.
• Use this insight to set appropriate credit limits.
• Contact one of the credit bureau agencies to sign up for their service. The three major bureaus are Equifax, Experian and TransUnion.
• Verify that you have a legal reason for obtaining credit reports from potential customers. If you are granting a customer any form of credit, you have a legitimate reason to screen customers for their credit worthiness.
Caution: Customers must sign a credit application before you obtain their credit report. Review the latest privacy and disclosure guidelines listed by the federal and state governments.
Accept credit cards or offer discounts to speed up cash collections.
• Businesses and government agencies use credit cards to make a wide variety of purchases.
• Instead of waiting 30 days, 60 days, or more to collect payment, you can get paid in 2 or 3 days.
• The burden of collecting shifts to the credit card company instead of you.
• When billing a customer, offer a cash discount for paying within a set date of the invoice. A 2% discount if paid within 10 days of the invoice date amounts to a $200 savings on a $10,000 purchase. State this savings clearly on the invoice.
Caution: You'll have to pay a percentage of each sale to the credit card company, and possibly a monthly fee, but those expenses may be negligible when you consider the time and money you'll save by not having to send out monthly statements or pursue payments..
Use informal sources of information.
• Read trade publications regularly. You can obtain much insight into the dynamic changes in your industry that might affect your customers.
• Use your personal and professional contacts for their insights into current or new customers.
• If you have outside salespeople, ask for their opinion and insights.
Caution: Verify any verbally obtained information.
Credit terms should be clearly stated.
• Set terms covering goods/services, invoicing and payment and obtain your customer's agreement prior to entering any transaction with them.
• Issue invoices as soon the merchandise is shipped.
• Ensure the invoices are sent to the correct address and department, the purchase order number is listed and include the accounts payable person's name if known.
Caution: Invoice via email wherever possible, using a PDF. It is cheaper, quicker and more effective than regular mail. Email can help you to prove the invoice has been sent and received. Reminder letters can also be sent electronically. Make sure that all communication has the correct email address of the individual responsible for authorizing payment. Otherwise, it may end up as junk mail or be deleted by the wrong individual receiving it.
Follow up quickly.
• Don't leave more than five to seven days to follow up an invoice. Your customer may be disorganized in terms of paying their bills.
• Make certain the invoice has been received and verify that there are no billing problems.
Caution: If you wait until the invoice becomes due, then you may find that they did not receive the invoice or that they have been sitting on a question that delayed payment.
Address customer credit issues early.
• Verify your customers' credit status periodically.
• Age your accounts receivable. Keep a spreadsheet of all customers that comprise accounts receivable. The list should be arranged by due date, and should be updated at least weekly. This list can be used to identify slow payers and non-payers.
• If a business starts to show signs of a deteriorating financial position you may have to reduce the level of credit, shorten payment terms or sell to them on a cash basis only.
Caution: Take detail records of all conversations and any promised payment. Mail or email monthly reminder statements and keep calling until you get an answer. There is a small percentage of past dues that represents a real potential for bad debt loss (about 1%, according to the Indiana University study). Identify this small percent early. These are the ones that have long-term financial problems and/or are being uncooperative. They are the ones who don't take or return your phone calls or break payment arrangements Stop selling to them until payment is received and be cautious about renewing credit.
You can factor (sell) your accounts receivable.
Factoring involves selling or assigning your accounts receivables, usually to banks or finance companies, in order to obtain immediate cash or working capital.
• It results in a cash inflow without creating any debt or transferring the business ownership.
• It is also a method to increase sales without having tensions for any loan repayment.
• The amount of cash you receive is conditional on the customer's creditworthiness and is not based on your credit
• Accounts receivable factoring generates immediate cash which can be used to fund payroll, taxes, inventory or buy new equipment and tools to expand your business
Caution: You will not receive the face amount of the invoice. There are several variations of factoring. The amount of cash is typically 80% of the invoice value. Once the invoice is paid, the remaining 20% is paid to you after the factor deducts their service fee which can be substantial. You should weigh the service fee against the cost of having to borrow money to fund your business operations.
Communication builds trust.
• Keep informal communication lines open.
• By speaking to your customers regularly you can avoid many payment problems and encourage healthy communication.
• The more personal a relationship you develop, the further up on the payable list you get moved.
• Communicating with your customers can also highlight opportunities. There could be the potential to increase sales or offer more credit to organizations whose financial health improves.
Caution: Don't get on the phone and beat up customers just to get a payment. That's the easiest way to lose customers forever. It takes more money and effort to find a new customer than to keep an existing one even if they are slow paying.
Selling on account is an excellent method of increasing sales. However, each dollar of accounts receivable represents a dollar not collected in cash. Managing your accounts receivable and maintaining communication with your customers can help keep your cash flow flowing.
