Brass Tacks: Collecting payment is an enterprise’s essential nutrient

Q. In a previous column you traced a firm’s cash shortfall problem to its collection practices. I’m fairly diligent when it comes to collecting my bills, but, try as I may, I always seem to be behind the eight ball when it comes to balancing “cash in” with “cash out.” Any tips?

A. While it’s always more exhilarating to “sell,” a sale is nothing more than a bookkeeping entry until the buyer’s cash is in hand. The real positive bottom-line impact comes from collecting the proceeds of a sale quickly so that you have the cash to use — to create new inventory, to pay down debt or to acquire a new company asset.

Unfortunately, while most customers will eventually pay what they owe, it generally happens on their schedules. Since it’s your schedule of operations that determines your cash needs, you must be proactive in getting your customers to pay up in a manner that appropriately complements your internal cash flow needs.

Here are a few Brass Tacks tips for accelerating your collections:

• Send out invoices immediately after goods are shipped or service provided (and include a postage-paid return envelope). Send another invoice two weeks later if payment hasn’t been received. Also, maintain a strict biweekly schedule for sending out “late notices.” (Don’t give this job to an entry-level drone; we’re talking about your money here.)

• You and your designated A/R enforcer should get a weekly report that graphically highlights the status of outstanding receivables and flags slow pays for immediate contact. Make sure the warning bells chime after thirty days and clang after 45.

• The collection process should look like a personal quest, not a computer-generated round of “voicemail tag.” Forget form letters. People love to beat a “system;” they’re less brave when it comes to dealing one-on-one with a warrior with a cause.

• Unless you have a big, capable staff, allocate at least two hours each week to making personal follow-up phone calls to the folks who are holding your cash hostage. Know what the net contribution of each customer is to your bottom line so you can allocate your time and tact accordingly. Separate the “OK slow pays” (big, regular customers that buy at the right price) from the “NO-NO slow pays” (small, infrequent, low-margin customers). After you get your money, fire the latter group. Never worry about losing a bad customer.

• With the first call be understanding but firm, indicating how important cash flow is to the sound operation of your growing enterprise. Never get hostile (you don’t want to goad the delinquent customer into proving he’s stronger than you are), but make sure that you clearly state what — and when — your subsequent actions will be if your first call doesn’t produce immediate results. Hold the collection agency/lawyer warnings for the second call or later. Learn to be effective as both Jeykll and Hyde — playing the right role at the right time.

• Make sure you are talking to the right person, one who realizes his or her company has something important at stake — someone who can write a check pronto. Let them know who you are and how important this call is. Record the names, date and phone number of the person you talk with and keep a record of what is agreed to. Better yet, follow up with a letter reiterating your agreement and, if you sense it will help, copy the top dog.

• Squeeze all the information you can out of each conversation (except reasons why the customer is having a hard time — you’ve got your own problems).

• If, after all is said and done, it looks like immediate full payment is a stretch, ask for a specific amount to be paid next week (get a specific date). Never ask, “Well, how much can you pay?” Structure and execute a formal, written payment plan, complete with payment dates, penalty clauses and incentives.

• Reward those who pay — and penalize those who don’t — with discounts or late fees — and enforce your policy.

• Make sure you can put the cash to use as soon as it becomes available. A lock box at your bank is a good tool for reducing the downtime of incoming cash.

• If all else fails (according to your very firm policy as to how long you are willing to wait), hire a professional and be willing to pay whatever commission is required (fees can go as high as 50 percent). Less than a quarter of receivables over a year old are ever collected. At this point, you’re as concerned as much with principle as with cash. You don’t want to be featured as a “patsy” on the “Deadbeats of America” Web site.

• Always keep in mind while you are waiting for payment that your firm is acting as a no-cost banker for your customer. While you are twiddling your thumbs, your slow-pay customer is using your cash, interest-free, to finance his operations and fatten his bottom line. If nothing else motivates you to collect, this thought should.

• Don’t continue to sell to someone who isn’t paying and has a bad track record with your firm. You don’t need the grief and you won’t get the money.

Paul Willax is a professor of entrepreneurship and chairman of the Center for Business Ownership Inc., Amherst, N.Y. He also is the author of the book, “Brass Tacks Tips for Business Owners,” available at barnesandnoble.com. If you have a question or suggestion for his column, or to receive a free, weekly e-mail newsletter, “Brass Tacks BrainFood,” write to Willax@TheBrassTacks.com.