A member lamented in a recent Chief Executive Boards International meeting, "I have huge customers who hold onto my payments for 60 or 90 days. What can I do about that?" As always, other members had some good ideas. Here are some of those:
- Become the squeaky wheel -- Your terms are net 30. You expect payment 30 days after you bill. So what's the matter with calling the person responsible for paying the bill (you will have to figure out who that person is) 15 days after the billing date to make sure he or she has received the bill and scheduled it for payment? At the same time, you can ask when that will be. If it's outside your 30-day terms, ask, "What can you do to move that date up?"
- Become more squeaky -- If you don't receive payment at 30 days (or, say, 40 days), call again. Being firmly polite, you can ask again what the person can do to get your bill paid more promptly. Call weekly thereafter. The member who uses this process says that the typical A/P clerk doesn't like getting these calls and after she figures out that you'll call every month she'll make sure your bill gets paid, whether others do or not. Again, the most important part of this strategy is polite persistence -- a businesslike, non-threatening call, simply asking for her help getting the bill paid more promptly.
- Go to the top -- A business owner once told me he got so frustrated with a multi-billion dollar customer using him for a bank, he called the CEO and said, "Hello, my name is Mike and my small company supplies yours with IT services. My invoices wouldn't make the roundoff error in your cash accounts, but they're being held 90 days by the Accounts Payable department to conserve cash. I'm very happy to be an IT Services provider, but I have a problem with being used as a bank. My employees expect to be paid every two weeks, and I'm hoping you can do something to get my invoices paid in 30 days, per our contract terms." He said the results were amazing. When the CEO's assistant calls A/P and says, "Please make sure Mike's invoices get paid on time" it solves the problem. Again, politeness and a businesslike approach will usually work.
- Prompt Payment Discounts -- A discount of 2% for payment in 10 days sounds reasonable -- or does it? Let's do the math. Say the customer typically pays at 60 days, and your discount gets him to actually pay in 10-15 days (note that customers will regularly take the 10-day discount and then not pay within 10 days). So, you get the money 45 days early for which you paid 2% (think of it as borrowing the money back from the customer until when he would have normally paid you). What's the interest rate on that money? 365/45 times 2% equals 16%. That's why you have a bank and a line of credit. If you have big, creditworthy customers, your bank should be willing to loan you, say, 75% of your AR at decent interest rate of prime plus 0%, 1% or 2%. That's about a 5% rate right now, and you can go in and out of it only when you need it. If you haven't increased your line of credit recently, now would be a good time to do that.
- Accounts Receivable Factoring -- One financial commentator called this the Crack Cocaine of Business Capital. It's easy to get on, and hard to get off. This is a very expensive solution, suitable only for a last resort. In factoring, you discount all your invoices to the factor provider, they pay you and then they collect them. Their returns are handsome, ranging usually from 18% - 24%. Of course, that return represents your actual cost (as an interest rate).
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Terry Weaver
Chief Executive Boards International
http://www.chiefexecutiveboards.com/
TerryWeaver@ChiefExecutiveBoards.comhttp://www.chiefexecutiveboards.com/
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