Bad Customers or Bad Systems: How to Collect Money from Slow Paying Customers
For many small and midsized companies, collecting cash on a timely basis from customers is one of the greatest challenges a business faces. It is often a delicate balance between maintaining good customer relationships but letting the customer know that your business success and continuity is dependent upon collecting cash from them so that you are able to pay your employees.
Internet based businesses have an advantage over traditional businesses in that payment is received by the seller before delivery of the good or service as credit cards, Paypal and other electronic payment methods are accessed and approved before the transaction is completed on line.
Unless your business is one that can completely move to the internet, there are several steps that you can take to significantly increase the amount and timing of your cash collections from your customer and at the same time increase customer satisfaction. In essence, embracing newly developed technologies and strategies in customer “order to cash” processes, your business can emulate the payment efficiencies of Internet based businesses.
The High Cost of a Bad System
Companies that bill customers for goods or services when or after the good is delivered or the service performed need to have great systems for cash collection follow-up. Poor cash collection systems can result in:
- High order-taking error rates – did the sales person provide the proper terms and payment agreements in the sales ordering document?
- High order-fulfillment error rates – did the production and fulfillment people get the order right?
- High DSO (Days Sales Outstanding) rates – Is the customer using you as a “bank,” delaying payment so they can pay their other vendors first?
- High cost of dispute resolutions – How to effectively play the good cop/bad cop role when it comes to collecting cash from a customer.
- Inefficient/ineffective collection processes – How much are you writing off on receivables that actually could be collected with the application of a little creativity or a call from senior management to the client rather than your billing department. Don’t wait more than 30 days after billing to call a customer to collect payment.
The result of a poor billing and collection system is long-term losses due to customers going to better managed companies for product or services. If the customer thinks that your process for billing and collection is poor, they will generally have a poor impression about your entire organization.
Addressing Slow Paying Customers
Let’s assume that your billing and collection systems and processes are just fine but you still have too many slow paying customers.
Where do you start? Here are some thoughts.
-Start by looking at how to streamline internal processes and making it easier for customers to work with you – Is it easy to do business with your company? Is every contract negotiation a painful event for both parties?
-Know and understand your current and prospective customers and the cash flow of their business to help reduce non-payment risk and tailor collections strategies – for example if you are a subcontractor working for a general contractor, that general contractor might not get paid until certain milestones are achieved. Conversely, that general contractor has to consider that you have employees to pay every two weeks.
-Communication, between departments and with your customers, is key to efficiency and visibility into cash flows – move from emails to real time data and information sharing (e.g. Dropbox).
Strategies to Collect Cash
Consider doing business with your company from a customer’s perspective. Is your company as efficient in handling the customer’s business, as it should be?
-Implementing or expanding automation of the Order-to-Cash (O2C) cycle.
Quote/Order to Cash (O2C) normally refers to the Enterprise Resource
Planning (ERP) process in which the Company takes customer sales orders via different sales channels (such as email, internet, sales person, fax or by some other electronic means) and then fulfills the order, shipping and logistics and generates a customer invoice and collects payment for that invoice.
– Standardize your procedures for product or service quotation and order management.
– Integrate order entry, credit, billing, and collections.
– Investigate benefits of event management and automated alerts.
– Centralize customer risk information in a single location.
Much of the consumer sector has moved to electronic bill pay from paper checks and this trend will continue. However, many businesses have been slow to embrace electronic payment processes. Your company should be able to accelerate customer payments by incorporating technology into your vendor payment and customer collection processes.
- Event management (triggers and alerts) – Are you sending out new customer shipments when you have not been paid for the last shipment? Technology would “trigger” an alert, which would allow you to use the potential shipment as leverage to collect the old receivable.
- Electronic interfaces to banks and customers – If you are not requesting your customer to pay via ACH versus a check, you are likely affecting your cash flow by almost a week due to the processes of cutting, approving and signing checks by your customer.
- Web-based and electronic sales order management applications are very effective as they can be used to require payment before order fulfillment.
- Credit management solution – do you know the credit worthiness of your client? Do you adjust credit terms based on the customer’s history of paying you and others?
- Electronic Invoice Presentation and Payment solution – Are you still sending out paper bills to customers, which adds additional days delays to getting paid?
- There are many other technology-based systems that can be purchased inexpensively that would improve your business processes, accelerate cash collections and improve customer services. A list of a few are as follows:
- Customer Relationship Management (CRM)
- Advanced Planning and Scheduling (APS-APO)
- Sales & Operations Planning (S&OP)
- Procurement (Business Commerce & Cash Management)
- Extended Warehouse Management (ETE execution tools)
Many businesses (and bankers of businesses) find that businesses “grow themselves into the ground.” The faster you grow, the more money a business needs to invest in people and inventory. If you are not collecting money from your customers quickly and efficiently you will find yourself with a successful business in terms of sales but a very unsuccessful business from a cash flow perspective.
Michael Evans is the Managing Director of the Northern California office of Newport LLC.