SMART BUSINESS: Turn Receivables into Cash

If your collection procedure consists of making out invoices, mailing them and waiting to get paid, consider this: Each account receivable represents your money, and it’s up to you to turn it into cash.

Landscape businesses have a particular challenge – during busy seasons it’s difficult to take the time to change policies, and when it’s slow, there is a concern about customer retention. Still, supplies, plants, vehicle maintenance and employees have to be paid, and one of the ways to do that is to make sure you collect on all outstanding invoices.

Credit is a privilege, not a right, and if customers expect you to carry them on the books there is something wrong, even if they have been your customers for a long time. One of the best ways to ensure cash flow is to get your customers to pay you on time.

INVOICE INSIGHT. Hopefully, you established some type of payment policies and shared them with your customers when you started doing business together. Now it’s your job to reinforce those policies. Here are some suggestions that can be quickly implemented.

1. Invoices should be mailed so they arrive on or before the first day of the month. Even better than mail is if you can personally deliver or drop off the invoice at the customer’s location. If you don’t use invoice forms, make sure it is clear to the customer that the correspondence is an invoice. In many instances, this can be as easy as using “INVOICE” as a heading.

2. Invoices should be dated and have a code or number that makes it easy for you and your customer to identify. In that way you can quickly track payments and identify the month of an outstanding invoice. Invoices may be numbered consecutively, or use any other method you find helpful. The first three letters of the customer’s name followed by the date might be a useful system.

3. Address invoices to the person in charge of getting the invoice paid. Hopefully, you acquired that person’s name, title and telephone number when you set up the account. Invoices sent to the wrong person may take some time to trace, but if you have complete information, you will find it easier to follow up on late payments.

4. Each invoice should include the name and title of the person who authorized the work, exactly what was done and when, the total cost of supplies and materials, and your payment terms, such as “Due Upon Receipt.” You may also want to add a line somewhere on invoices that addresses the majority of your customers, such as, “Thank you for your business.”

5. Sometimes it helps to give customers an incentive to pay on time. One way to do that is to include a small discount for payments made within 10 days. You could also establish penalties for late payments (i.e. 1.5 percent of the unpaid balance charged each month that the payment is late). If this isn’t your standard procedure, notify customers in advance by stating those terms at the bottom of invoices before you issue the charges for the first time.

GET ORGANIZED. Small businesses often fail to track invoices in a timely fashion. But to ensure on-time payments, setting up a system that shows you each month who has paid, who hasn’t, who paid on time and who didn’t is crucial.

You can also rate your customers according to their payment patterns. The system should be easy to understand, such as grading them on a scale of one to five, with credit limits set for each level of account.

When you set up the system, also include specific methods for following up on invoices that are unpaid. Be firm about following the procedures and remember, a slow pay customer is not necessarily a no pay customer, so keep your communications friendly, courteous and focused on facts.

Unfortunately, there will sometimes be customers who won’t pay or who will have to be encouraged to pay, so get ready for those instances beforehand by writing two different types of collection letters to be used later: one for accounts that are 15 to 25 days overdue, and the second for accounts 35 to 45 days late. If possible, the letters should be hand delivered. The first letter should contain all pertinent details contained in the invoice, point out that the account is overdue and state that you appreciate the fact that they will address the situation immediately. The second letter is a final notice. That letter should itemize the number of times you attempted to collect on the account, mention the failure to respond, and include that if payment is not received by a specific date the matter will be turned over for collection. If you are uncomfortable writing the letters, you may want to consult a lawyer or an accountant with that type of expertise.

FOLLOW UP. How you follow up on receivables can make the difference between getting paid or not getting paid.

Within two days or so of your first reminder letter, call or visit the customer with the assumption there has been a snafu which can be easily remedied. Make sure the invoice was received and is in the hands of the right person. Sometimes getting paid is as simple as getting the bill to the right department and the right individual. For example, if they are a small company, they may not have an accounts receivable department and the person who handles payables has other responsibilities, or the customer may have changed their procedures or changed staff.

Get a date when the payment will be made. There is nothing impolite in asking for that information. If you find out the customer is having money problems that will soon be resolved, you may be able to set up payment terms that are mutually agreeable. Remember, when you issue credit to a customer you become, in a way, their business partner and it is up to you to make that partnership work to your advantage. Be firm about your payment expectations. If special arrangements are necessary, make sure you are speaking with the person who is authorized to make those promises. Then stay in close touch until full payment is made.

Isolate line item disputes from payment problems. Encourage partial payment if there is a line item dispute.

If the customer is a “we pay when we get paid” type, and you are going along with that, make sure you get the details of when and from whom they expect payment. Let them realize you are their “partner” in the deal and, as such, you are entitled to that information. Remember, if you are not getting paid, it is likely the customer is not paying other vendors. Further, if the customer has limited cash flow, they will tend to pay the creditor most aggressively pursuing payment first (the squeaky wheel theory).

If you feel frustrated in getting payment, it usually means it is time to consider sending the account to an outside agent or attorney. It may still take several months to collect payment of some type, and if the outstanding amount is significant your cash flow can be impaired, so it’s important to follow your instincts.

If you find yourself with numerous past-due accounts, you should consider consulting with an attorney or accountant. Most collection professionals charge by receiving a percentage of any amounts recovered.

REVIEW YOUR POLICIES. Once you have collected on your overdue accounts, take a close look at where you can make changes and prevent or limit future problems and losses.

Credit applications. If appropriate, take a credit application, even if you know your customer very well. The application should include the authority of the person seeking credit, the names of persons authorized to direct your services, Federal Tax ID or sales tax exemption status, payment contact, and amount of credit sought. Also get the name of the bank, and credit and industry references. Be meticulous about the process and check credit references.

Create a game plan. Establish a credit plan with firm rules that you share with customers when you set up the account. These rules should include: the size of credit lines; any limitations on products or services sold; and interest or service charges for late payments. It seems obvious, but those rules apply to everyone, even the customers you know very well. Determine realistic parameters such as, “How late is late?” In other words, when is a payment late and when is it becoming a problem?

Track receivables. Keep information current and review that information on a regular basis so you know when customers have exceeded their credit limits, or when you need to cut off additional sales to a problem customer. If you are not the person who handles receivables, set up a system that automatically flags aged receivables and handles discount provisions for prompt payment, automatic interest or service charges for late payments, and provisions for returned goods.

You or your employees should also be watching for early warning signals such as: changes in ownership; changes in philosophy, location or personnel; a sudden increase or decrease in services requested; and if publicly traded, a dramatic change in the company’s stock price.

Encourage prompt payment. If a customer is slow to pay and it is a company, learn about the company’s payment procedures, then look for places in the system that produce your check so you can head off problems before they begin. This may be as easy as finding out when they process invoices and how far in advance those invoices have to be received in order to be paid that month.

Focus on the positives. Credit extension should be considered a positive that is an integral part of what allows you to do business. A customer who is approved for credit should be made to feel privileged to join the ranks of your other credit customers because he or she has qualified to be your business “partner.”

The author is a partner at Javitch, Block & Rathbone, which specializes in collections and business litigation. JB&R has offices in Cleveland, Columbus, Cincinnati and Indianapolis.