The fine art of being paid on time
By Paul Hammond, Vice President of Commercial Audit for M&I Bank
It is imperative that your accounts receivable (A/R) are properly managed to maximize your cash flow and free up working capital. Succeed with a clear, firm process—and clear communication with your customers and sales staff.
Begin before the sale: Know who’s buying. Collecting from a customer that has poor or no credit, cash flow challenges, or has become insolvent, will be an uphill battle (if not impossible) despite the strongest efforts. It is considered sound practice to ask prospective customers for three credit references -- one bank and two trade references are common. In addition, consider purchasing a credit report from a legitimate source, such as Dun & Bradstreet (D&B). At a minimum, credit applications should be completed prior to selling to new or unknown customers on terms.
Set clear terms: Establishing understood and agreed-upon terms with your customer at the outset is critical. You like to be paid monthly; your customer may like to pay every two months. Reach a defined (written if possible) set of sales payment criteria with which you both can live. Once reached, abide by the agreement – don’t call after 30 days if 45 days is the agreed-upon term.
Tell customers your payment terms up front. Typical terms are net 30, net 45, or net 60 -- meaning the full amount is due within 30, 45 or 60 days. However, terms are industry sensitive and may reflect a seasonal business, e.g. delivery by 10/31 with payment due 03/01 of the following year. These are referred to as “datings”. It is common to see discounts offered such as 1%-10/net 30; meaning the customer gets a one-percent discount for paying within 10 days or has the option to remit the full balance within 30 days.
In a world where cash is king, it pays to get your money as quickly as possible. The faster you convert your sales back to cash, the lower your financing costs will be. A/R collections are often used to pay down a line of credit which reduces interest expense. Or you may be able to take advantage of prompt-pay vendor discounts. Set your pricing to absorb the expense of offering a discount.
Invoice promptly: The best practice is to invoice immediately upon shipment or job completion. Waiting a week or two to invoice simply means you’ll wait a week or two longer for your money. Do not invoice prior to shipping, as that violates generally accepted accounting principles. Occasionally ‘bill and hold’ agreements are established to accommodate customers – a good idea is to put these in writing.
Include payment terms and due date on every invoice: Invoices should be numbered sequentially to facilitate accounting and tracking.
Your credit management is only as good as the people you have implementing your credit policy.
Call the right person, right away: Your accounting software package should include an A/R aging system that sorts invoices in, typically, 30-day groups: invoices which are “current” (not yet due), 1-30 days past due, 31-60 days past due, 61-90 days past due and over 90 days past due.
A/R agings will typically track by either “due date” or “invoice date.” If an invoice has 60 day terms, it will remain in the “current” bucket for two months on a “due date” aging, but will shift to the 1-30 day group after one month from invoice date on an “invoice date” aging.
Call your customers when their invoices are past due. Some experts recommend calling on day 31; others suggest waiting a week to 10 days. Regardless, the time frame you choose should accommodate your business needs, as well as the needs of your good-paying customers.
Call the right person—preferably a contact in the firm’s Accounts Payable (A/P) or purchasing department. Let them know that you haven’t received payment and offer to re-send them the invoice(s) electronically or via fax.
Listen—and lead: Communication skills are critical to collections. Listen to your customer to understand what’s behind the late payment. Are they unhappy with the product? Are they in a cash flow crunch? Have they simply lost the invoice?
Then lead the customer to commit to a payment date and amount – partial payments are better than none even though this may create accounting challenges. If a company has cash flow problems, work out a payment plan. Again, nail down the specifics -- how much they’ll pay and by what date. Make sure your sales staff knows when a customer is having trouble making payments.
Credit managers should be relationship oriented yet very strong and detail oriented. Your credit management is only as good as the people you have implementing your credit policy.
Exhaust all efforts before turning a customer over to a collection agency. Another alternative is “factoring” whereby you sell doubtful A/R to a third party collector; often for a deep discount.
Communicate with every invoice: Invoices should reflect your company’s brand and convey your seriousness about being paid. Be sure to include:
- Invoice number, for tracking and accounting purposes
- Invoice date – date the invoice was generated from the system
- Payment terms
- Due date
- Ship date
- Clear description of product or service purchased
- P.O. # and date – date order was placed
- Prior balance and payments received
- Amount due
Employing these basics as part of your sales, invoicing, and credit management policy will help put you on firm footing from which to manage your business and cash flow.
