Outstanding Accounts Receivable Is as Bad as Outstanding Accounts Payable
Reducing your shop’s percentage of past-due accounts makes it easier to find a buyer when you’re ready to sell your business.
When I see a client with consistently high percentages of past-due accounts, I want to know why. (I can’t help it. I’m a process guy. I like to measure and improve things.)
Although reports generated by accounting software have made it easy to track the percentage of past-due accounts from week to week and month to month, it’s difficult to decrease those percentages without taking a proactive approach to encouraging on-time payments.
Of course there will always be people who can’t or won’t pay their bills. Some will have financial emergencies, while others may intend to defraud you. We are not talking about those customers (and hopefully you have a process for collecting from them). What we are talking about are things you can do to change the behavior of good-hearted customers who simply don’t pay their bills on time.
Here are our 10 best suggestions for improving your odds of getting paid more promptly.
1. Incorporate prompt payment practices into your customer service program.
Every touchpoint during the customer’s “buying journey” should evoke a favorable impression of your business. This includes billing.
Your staff should do everything possible to avoid misunderstandings and remove impediments during the billing process. Your customers should never feel powerless or deliberately deceived.
2. Be impeccable in your billing practices.
Incorporate these practices in the processes used with your invoicing or Print MIS software:
- Make sure the amounts billed are correct.
- Accurately apply discounts.
- Set up invoices that are clear and easy to understand.
- Document and explain unexpected charges.
- Send invoices soon after the job is delivered.
- Take note of special circumstances affecting each client.
- Deposit checks promptly.
- Correctly apply payments.
- Thank clients for their payments.
3. Monitor the past-due numbers each month.
Often a client will say, “Well, we’re running about 7% in the over-30-days column, but we know that 3% are good for it.” That’s not what we’re measuring.
We want actual figures tallied on the same day each month, preferably right after bills go out. As business starts to return to normal in a post-COVID-19 chapter, strive for a monthly decline in your percentage of past-due payments.
4. Be ruthlessly truthful about your receivables.
You cannot lower your percentage of past-due accounts if you are not honest about your financial situation. You must understand your exposure, the cash flow impact of your receivables, and your relationship with your vendors. What will happen If you cannot pay your bills due to customer non-payment? What if you lose a customer due to a misunderstanding?
5. Have a straightforward, consistent process for credit applications.
Some print companies have past-due accounts from customers who never would have met the most minimal credit approval requirements.
Some owners think their gut instinct and a handshake is sufficient for judging a buyer’s ability to pay. That’s not always true. Go through your uncollectible accounts from the past three years and note how many of those accounts passed the gut check.
Adopt best practices for approving credit applications. Start with a quick online search of that buyer. If you find no red flags online, then order a credit report and call references.
6. Communicate your payment terms on your contracts and your invoices.
Let customers know what to expect. If your terms are net 15 from the date of the invoice, say so. Most people start with the premise of net 30 from the date of receipt. So if your terms are different, make sure they are well communicated.
I’ve heard from more than one client telling me that many of their customers will dictate terms to them, including late fees, and if they want their business, they have to agree. Just remember: Everything is negotiable. You may be able to get other concessions or fees to offset the burden of accepting the customer’s terms.
7. Understand what your customers must do on their end to get an invoice paid.
If you are dealing with a large company, you will be interacting with an accounts payable department whose main function is to match your invoice with an approval from the appropriate person in their company. Until the approval is received, your invoice may as well not exist. In these situations, I recommend you also send a copy of the invoice to the person who approves the payments.
Make arrangements with your contact person to email the copy to their home office so the approval can be expedited. Include everything on the copy they will need, including the date due and the terms & conditions.
Also include documentation that proves the invoice is valid, including a unique invoice number, all purchase orders, revised P.O.s on change orders, signed order forms or contracts, etc. Include all possible ways to contact you if there is a question.
Accounting departments in large companies may have high turnover, so you always want to give them everything they need. You don’t want your invoice to land on the “deal with it later” pile. Bills that require reaching out for additional details may get postponed or ignored.
8. Create a hassle-free environment for your customer to pay their bills.
Review your payment options and make sure you are providing what your clients need, on a timeline that is convenient for them.
- Can customers leave a message, text you, or email you 24-7 if they have an issue?
- Are you available online, by email or by phone at the times when your customers are dealing with their bills?
- Do you offer a range of payment options? (e.g. check, credit card, electronic funds transfer? PayPal?)
- Can they set up a secure recurring payment?
- Can they log in and view their invoice online, along with their previous payments?
- What kinds of discounts are available to them?
- Do you have a “Frequently Asked Questions” section on your website that addresses billing questions?
9. Don’t use the collections process as a net to catch past-due accounts that could have been handled with better internal processes.
If possible, avoid reaching the point where an outside agency must be called in to intensify the collections process.
Even though the Federal Trade Commission’s Fair Debt Collection Practices Act doesn’t govern business-to-business transactions, most consumers now know that abusive or unfair behavior by professional companies is illegal. The people who handle accounts payable for your customers know it too.
10. Make your customer an ally in the bill-paying process.
Don’t be afraid to ask customers how you can make their bill-paying process easier. Their feedback is invaluable.
In everything you do with your customer, remember that you’re in business to not go out of business. Even the most philanthropic company needs to cover costs and then some. If you can stand shoulder to shoulder with your customers and look out for one another, everyone benefits.
As you look at your invoicing process and the progress required to improve your receivables, keep measuring, keep setting the bar high, and keep involving your employees in continuous improvement.
Improving your past-due accounts can be done. But it requires diligence, attention to detail, and a good methodology. If you start today and make a promise to revisit this topic every quarter, you will be amazed by the changes in your bottom line.
NOTE: This is not legal advice. I recommend you have your attorney review your policies. Terms will affect cash flow.
If you are thinking of selling your business in the next few years, you want to talk to me now. I can tell you more about how the state of your financials can affect the type of offers your shop may attract. Let’s talk. (561) 543-2323