Category: Credit and Collections

Are Your Business Collections a Roll-of-the-Dice?

Are Your Business Collections a Roll-of-the-Dice?

 

Sales, without any doubt, is the life blood of any business. No business can survive and grow without connecting the value of its goods or services with customers willing to purchase.  Correspondingly, no business stays in business without receiving timely payment for the goods and services they have provided.

During two decades as a corporate credit manager, and later as a consultant, I have worked with thousands of small business owners that lament about how difficult it is to get paid after doing everything they promised to deliver their product or service. The most common reason they give for their struggle is – Poor Cash Flow.

Slow payments to vendors are indeed a result of poor cash flow from your customer to you; however,  

IT IS NOT THE CAUSE – IT IS JUST A SYMPTOM.

The first question you, as a business owner, need to be able to answer is, WHY is your customer unable, or unwilling to pay you?

Is your customer unable to get paid from their customers?

Is your customer growing quickly and struggling to keep up with increasing cash needs?

Has your customer lost key personnel?

Are your bills less of a priority than their other vendors?

Has your customer experienced a major, unexpected event of some type?

Is your customer’s business in trouble?

The answer to these and other questions you ask will reveal the CAUSE of cash flow problems.

The take-away I want to leave you with is to dig deeper when your customer tells you they haven’t paid you because of cash flow. The way your customer answers these type of questions helps you begin to understand why payments are slow and often the conversation can strengthen your relationship with your customers.  Answering these questions can help you to see patterns in your own receivables systems.  As a business owner you don’t want to fight the same battles over and over, so clues to how to develop systems that help you minimize the variance in payments can yield repeatable and improved results.

If your business is B to B, business to business, you are billing your customers and carrying accounts receivables. To decrease the chance of your business not getting paid or being paid slowly you need to leverage the 5 Cs of credit:

Character – Capacity – Capital – Conditions – Collateral

In upcoming blogs I will look at how each of these areas factor into the decision to open new accounts and sell to new and existing customers. Subsequent articles will cover how you can use credit management principles to assure more consistent cash flow/collections and how collecting should be reframed as an important touchpoint in the sales process.

Selling and Collecting – And the Two Shall Meet

Every business I’ve ever worked for acknowledged that a sale, is not truly a sale, until it is paid for. Despite this caveat, these same businesses believed it necessary, some even felt beneficial, to foster a tension between the customer side of the business (sales) and the support side (credit & collections).

This unnecessary construct is a remnant of the old silo mentality, a holdover of 19th century manufacturing. This model was able to survive the 20th century because of an abundant supply of educated labor resulting from the post war baby boom and women entering the labor force.

Ultimately, this model wastes human capital and energy that can contribute diverse talents to the sales and customer relations cycle. Selling, in today’s stripped down lean organization, is no longer the sole responsibility of one department. Customers interact and develop relationships with many parts of your organization. These broader, deeper relationships require everyone in your organization is aligned to deliver previously unimagined levels of attention and service to all parts of your customer’s business.

As seller (the credit granting company) it has never been more important to align your business strategy and value proposition with every other part of your business that interacts with your customers’ business. Let us start with a typical sales traction.

 

 

CONFLICT RESOLUION

 

In this transaction sales has set the tone of what to expect in the business relationship, gives the prospect a credit application and tells them to turn everything in to the Credit department.

If the Credit department is being judged on the percent of total accounts recievable past due and bad debt it is easiest for them to be strict in granting credit. This maximizes the departmental objectives but works counter to business goal of making more sales,and maximizing profit.

This siloed decision process that makes the Credit dept. look good may artificially restrict revenue (sales) growth, under utilizes operational capacity thereby over stating costs while sending the unintended message to the new customer you are not as eager to do business with them as sales led them to believe. This, in turn, will likely cause you to miss future opportunities. This is an example of one department, at the beginning of the cycle, not aligning with the business strategy but supporting the those measures that make the department look good.

Historically the Credit Department has not been viewed as a selling function because it was not revenue generating. It was seen as a cost center or a necessary evil, to minimize risk. In this scenario the Credit Department talks to the customers accounting department to gather credit information. They will talked to either operations or purchasing at the customer again after the credit evaluation process is done to inform them of the credit line and terms of sale. The manner in which these processes are handled sets a tone and flavor that will inevitably be communicated through the customer’s organization and start to paint a picture, in their eyes, of what your company is like. The Credit Department is selling you and your company to a broader part of your customer than the Sales Department will be.

This same example of cost center departments interfacing with your customer and engaging in soft selling/ relationship building conversations, can be played out in shipping, receiving, reception and most others in your business.

It is my experience these support functions historically feel disconnected from the higher profile, well paid, selling part of the business. These people know they are integral to the delivery of product and service but do not feel appreciated for everything they do in their often invisible role. For many of these jobs the people are doing their job best, when their function is invisible. They are too often only recognized when there is a break-down in what they do. This lack of formal accountability and coorespondingly, recognition, results in them being mentally disengaged from both the opportunities and resulting successes of seeing each customer engagement, at any level, as a chance to serve and impress a customer.

As business environments become increasingly competitive you can ill afford to not fully utilize all your employees and their talents. When you engage customers deeply, across their entire organization you have the ability to forge much closer relationships and garner more business. Every business I’ve been part of acknowledges it is easier to grow sales with existing customers rather than find and sell new ones. When you empower and engage with everyone that works for you this becomes not just possible, but probable when done correctly.

 

 

Michael Londo

President

Just in Time Direction, LLC.

Credit is the Lubricant to your Business. So, why do I avoid making collection calls?

Like most entrepreneurs you started your business with a certain passion for providing a product or service. You have a conviction that you can do something better than what you saw others doing, or not doing in the market. Many people in your position believe if they provide a superior offering, they will be paid because customers will see them as the best choice among the alternatives in the market.

 

Most customers you have and will have are honest, hardworking and ethical in their personal and business relationships. As you grow your business however, you will come in contact with an ever-increasing variety of people and with the larger numbers things will get a bit more complicated.

 

Everybody you are, or will be doing business with is, in turn, doing business with or working for someone else. Everyone has a slightly different business model, value proposition, and background in business that orients them uniquely to their market. With all the varied backgrounds, experiences, education, training, and general outlook on life comes huge differences in the expertise needed to create and run a successful business. Some people know accounting, finance, some are engineers, sales people, or marketers. This diversity means everyone has “gaps” in what they know how to do or like to do. As human beings we tend to avoid doing what we consider our weak points because they don’t provide the much-needed reinforcement. Let’s face it, we are all in need of positive reinforcement, especially when we’re doing something as uncertain as creating a business; our livelihood and others depend on our success.

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People also have widely different access to capital. Undercapitalization is a leading cause of small business failure. People underestimate what it will take while they are getting up and running. This need for capital is why banks, credit cards, venture capitalist, family and friends exist or are drawn into new businesses.

 

You offer a product or service you strongly believe is a fair value and you do business with customers or clients that are, for the most part, honest and value what you sell them. So far this is a simple transaction. As you enter ever larger parts of the market place you will inevitably meet and do business with people that:

  • Are very good at what they do but not experienced running a business
  • Under funded
  • Overworked, overwhelmed and stressed
  • Procrastinate
  • Don’t have good bookkeeping practices
  • Avoid asking people for money
  • Have experienced a health problem or have a family member who has
  • Dishonest
  • Incompetent
  • Have legal problems
  • Growing too quickly
  • Have lost a major customer
  • Have lost a key employee
  • Just moved their office
  • Went through a computer system change
  • Had a business interrupting calamity
  • Etc . . . . . . . . . . .

 

The point is that you become exposed to all the potential downsides your customers are being exposed to.

 

This can be a rather scary proposition and is not appreciably different from all the unknown risk you might be exposed to working for someone else. This just part of business and life.

 

My first word of advice is to be systematic and prepared.

  • Keep a file on each new and existing customer
  • Document all conversations
  • Do not avoid calls about money, or emails about collecting overdue invoices. This is an unavoidable part of ANY business transaction. In fact, a sale is not truly a sale until you get paid for it.
  • When making collection calls, or engaging in collection correspondence, get the answers to 3 key questions each and every time.
    • Why is the invoice(s) past due? Cash flow is NOT an answer. It is only a symptom of something else.
    • Who is responsible for either resolving the issue raised in #1 above, or has the responsibility to authorize and pay?
    • When will the item(s) be paid? Or, when will that person do the research and get back to you with an answer that will then allow you to continue the collection activity?

 

Document the name of the people you talk to, their title and date of these conversations.

 

An equally crucial task is FOLLOW THROUGH and FOLLOW UP. The distinction between these is that Follow Through is doing what you said you would do if your company failed to deliver what the customer expected. Follow Up is confirming people do what they say they would do.

 

Effective collection is actually another type of sale. You are selling someone on the idea of paying you for something after your product or service has been delivered. It requires the integration of your sales, operations, accounting and collections functions. As a general rule, most customers are honest and will pay you. Understanding and documenting why you experience collection problems gives you the chance to learn what is not working in your business. If delinquencies result from what you, think of it as a spot operational audit of sorts.

 

 

 

 

 

 

 

All the same problems you encounter running your business will at some time or another occur in your customers’ businesses. Document everything. Since most small businesses do not have the resources to do in-depth credit checks, it is crucial you keep your finger on the figurative pulse of your customers. Slow payment, i.e. cash flow problems, that occur because your customer is having problems will be more quickly spotted by regular collection contact and asking the right questions of the right people. Documentation gives you the ability to see trends over time and have documented evidence if more aggressive techniques become necessary.

 

Credit and collection activities also help identify customers poised for growth. During a growth phase customers are often stressed for free cash flow and extending additional days to pay or increasing a credit line are two ways to increase cash flow. If you proactively and constructively engage your customer at these times and are willing to take a calculated risk, you can cement a bond that can last the life of your business.

 

Michael Londo

Vice President of Administration

Just in Time Direction, LLC.