Manage Your Receivables like a Rock Star – Part 2: Execution

Posted by Heather Villa, CMA, MBA, MSM on September 29, 2010 in: Bookkeeping & Accounting, Tips in 10

Extending credit to your customers can be good for business. Without the opportunity to “buy now and pay later”, you’ll need to run a business where you require payment up-front in order to complete the transaction. That might work for some businesses but not for all businesses. And chances are, it may not work for you.

In the last Tips In Ten we looked at how to set-up your receivables so that you are “optimized” to get paid and so that you are “optimized” to collect effectively. In this Tips In Ten, we’ll look at what you can do each day to manage your receivables and get paid.

Remember this important rule of receivables: consistent cash flow is much better than feast-or-famine. Remember that when arranging payment terms, payment plans, and how much credit you will give on a single order.

Remember this almost-as-important rule of receivables: debt becomes harder and harder to collect with each passing day. I’d even suggest it becomes exponentially harder to collect with each passing day.

Let’s collect!

Now is the time you’ve been mentally avoiding. But don’t worry, it will be easy. Get out the receivables list you created last time. (At first it might be a big list but once you start managing it, the list will shrink but you need to work it actively for 3 to 6 months before that happens.)

First, divide up your list of receivables into the following categories:

0-30 days
30-60 days
60-90 days
90+ days.

When it comes time for you to look at your receivables, start with the most recent and work your way to the oldest.

0 to 30 days old. The first step is to look at this list and identify which ones have been invoiced and which ones haven’t been invoiced.

  • If you have invoiced them, and they are a regular customer who pays on time, there isn’t much to do. Just sit back and relax.
  • If you have invoiced them and they are a brand new customer, give them a call. Be friendly. Just call and check to see that they received the invoice and ask if there is anything else you can do for them.
  • And, if you haven’t invoiced them yet, invoice them! If you’ve delivered the product or service and you’re just waiting until the end of the month to invoice, try invoicing them now and offering them a discount if they pay early. (This relates to the cash flow versus feast-or-famine issue mentioned earlier). In many businesses, invoicing at the end of the project instead of the end of the month can make a huge difference. (For example, if you finish the project on the 20th, invoice them by the 21st, they just might cut you a check when they do a run of checks on the 25th and you’ll receive it on the 30th. But if you finish the project on the 20th and invoice on the 30th, you have to wait nearly an entire month before they cut another check.) This 0-30 days is a critical time in receivables and the onus is on you to be proactive here.

30 to 60 days old. Next, review this list. If you sell to businesses, a lot of your invoices will be paid during this period. If you sell to consumers, they should mostly be paid by this point and longer credit should be granted only in certain situations.

  • If it’s a trusted customer and they normally have a longer payment cycle, you’re probably okay not calling them, but you should revisit your credit policy with them.
  • If it’s a trusted customer that is atypically late, give them a call. If you have a relationship with them and they are departing from their particular practice, there could be a reason. They might have lost the invoice – it happens!
  • If it’s a brand new customer who is this late, call them up and politely inquire about the status of your invoice. Ask for a date and time that they expect to pay.

60 to 90 days old. This is the danger zone. Most invoices should be paid by this point and if a lot of invoices are getting to this point you need to revisit your credit approval processes. If you’ve been working your receivables list effectively, then the only things on this list should be (1) the occasional trusted customer who has simply slipped out of their regular best practice and is likely just catching up on an old invoice they’ve missed; (2) customers whose debts are potentially going bad. It’s time to turn up the heat for anything in this zone.

  • For those trusted customers, just make sure you have a date and amount expected. That’s about all you need and there’s a good chance everything will be okay. If things have suddenly gone south for them, you should know that, too, because of your relationship with them.
  • For everyone else, they need to get a call in the first week to find out if they’ve paid. Get a date sent and the amount and call them back on the day you expect to get paid. In many cases, this might be a 3 day to 1 week turnaround on calls, depending on how they are paying. If this happens twice, you’ve probably lost the payment for good. If it becomes clear that they want to pay but can’t, get creative: Create payment terms over a longer period. Try going up the food-chain if it is a multi-employee company.

90+ days old. If it’s this old, sorry folks. I’m not saying you can’t collect it but don’t hold your breath. If you have to focus your efforts on something, focus it on your 30-60 day receivables and most of them will never get here. Most of the people who get here are not likely going to pay and you could give them a call but ultimately I call this stage of the receivables my “blacklist”. Keep this list. A colleague tells me that, on more than one occasion, he’s had buyers show up and pretend that nothing is wrong and, because of his file, he knows who they are and either collects from them or knows not to sell to them. And, if they are a business customer, you might see them pop up on the radar in the future if, for example, their business hit hard times and then was revived.

Getting paid in different ways.

If your customers are unable to pay, consider alternative payment methods:

  • I’ve seen barter work well in this situation.
  • Set up payment plans over an extended period of time.
  • Collect pennies on the dollar for the amount owed.
  • Ask the customer “what is realistic for you right now?”

Additional tips

  • When communicating with the customers on your receivables list, and they tell you that they plan to pay, get a date and an amount. Don’t be afraid to press a little by saying something like, “do you have an approximate date that you’ll be paying?” and then, “And you’ll be paying off the invoice at that time?” Many customers will volunteer this information without you having to ask.
  • Trust your instincts! You would be surprised how often they are correct even if there is no supporting evidence. Believe me, if I could count the number of times that I DIDN’T trust my instincts and paid for it…
  • Remember that credit is something you are offering to the client. They don’t demand it. Be wary of people who demand credit or, once presented with your terms, try to renegotiate. They could just be natural-born-bargainers, but they might also be trying to work the system! If you give someone credit, don’t just make your payment terms to be the thing they have to follow.

Bonus tip:

Sometimes collecting can be time consuming when accounts get past 60 days delinquent – and especially once they get into 90 days. Debt Collection Steps will attempt to collect the debt with a series of letters. If the debt remains unpaid, it will then be reported on their D&B credit file. Nobody likes to damage their credit file and I have found great success with this method.

Heather Recommends:

I love working with coaches, freelancers, and entrepreneurs to help them become more successful. If you'd like to improve your business, find out how I can help.

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