Collection Diplomacy Is Tricky
Calling to collect unpaid bills is a time-consuming exercise for established businesses, so imagine the headache it could be for entrepreneurs. Since start-up business owners usually don't charge enough for their services, they are usually behind the cash flow curve to begin with. Any timidity in dealing with "slow pays" further restricts their ability to generate the cash they need to fund their operations. "They are timid about asking for money, and I was guilty of this when I started, too," said Gordon Meicher, managing partner of Meicher & Associates, a Madison accounting firm. "They so much want to do a good job for people, to do good business, that they don't realize that getting paid is part of the process." The collections can be so problematic that TermSync, a new third-party accounts receivable service, has emerged to automate the process between businesses and their clients, but if you prefer to do things the old-fashioned way, IB conveys some advice from Meicher and Jim Hartlieb, senior vice president of First Business Bank.
Outside the collection box
According to Meicher, small business owners must be able to spot people who will not treat them fairly. There are certain telltale signs that you can look for, and some develop over time. "I had this client, and the first meeting was free," Meicher recalled. "Well, the first meeting lasted four hours, and that wasn't what was intended. Then, whenever I sent them a bill, they would say, 'Half of this should not be charged because it pertained to things we covered in the first meeting.'
"I struggled with that account," Meicher admitted. "I gave hundreds of dollars in free time and after one year, they ended up going somewhere else because they were going to give them a bunch of stuff for free."
Once older and wiser, Meicher developed a method of distinguishing between clients who thought only in terms of cost, and those who thought in terms of value. Needless to say, he prefers the latter. "I can see it when people come to my office," he said. "I try to get them to bring four years of tax returns. If they bring four years of tax returns and one cover is blue, one cover is green, one cover is pink, and one cover is yellow, it means they have been to four different accountants, so I know they may not be long for this world."
Clients who are trying to achieve value will pay you a fair rate for a competitive job, Meicher stated, and they will refer you to their friends. "Those people are the gold in your backyard, and you can tell that by the way they treat you," he said.
A typical collections policy, which should be established as part of your business plan, begins with expecting payment within 30 days. After 30 days, Meicher's customers automatically get a notice. After 60 days, they get a notice and a phone call. If they get beyond that, a person who monitors collections and works for the Meicher partners will contact them. If they go beyond 90 to 120 days, a partner calls them. Beyond 120 days, a collections service is called to duty.
"If you get to 60 days, it's not only 60 days, it's 60 days and pick up and pay," Meicher stated. "In the future, when we do work for them, they have to pay when they come in to get their returns because collection work is costly. It takes professional time."
All the more reason to establish your policy in the business plan, noted Hartlieb. "It's an important part of your business plan, and it's one that is often overlooked because most business owners' primary concern on the front end is getting customers in the door on the revenue side," he explained. "Once they are in the door and things are going well, it's a common area that can be overlooked, but it can do a lot of damage to your income statement and balance sheet if you have an account that does not work out."
In a sluggish economy, clients are more inclined to "slow pay," which poses a dilemma about how aggressive an entrepreneur should be. Both Meicher and Hartlieb recommend working out a payment schedule, which can save a relationship with a previously reliable client.
If you're going to extend credit, do your due diligence first. "With all the information that is available, whether it's on the Internet or Dun & Bradstreet, or just leaning on your banker from time to time, I would just say do your homework when you grant credit to a client," Hartlieb advised. "Once you decide to grant credit, make sure that you've got someone in your business – and maybe it's you, even though you wear a lot of hats – to monitor accounts receivable on a daily or at least a weekly basis.
"When you go into a relationship, you should clearly set the parameters with the customer as far as when the payment is due, and if you can't make the payment, this is what's going to happen. Tell them that they need to communicate with you, and you'll work with them so there is a clear level of communication on a consistent basis. It's not much different than banking relationships."
Knowing your client's business and having a clear understanding of what its goals are and what it's trying to accomplish will help you stay on top of what your client might be going through in various economic periods. That's another area where the communication piece comes into play.
A common trap that Hartlieb sees business owners falling into when they have a customer who is starting to stretch them out beyond 30 or 60 days, is excessively worrying about losing business if they take a hardball approach. "That could be true," Hartlieb acknowledged, "but the math I like to work through with them is to say you work on a margin of 20%. You sell something for $100, you make $20, and all it takes is one of those deals to go south and you've just lost months and maybe years, in some cases, of profitability, depending on the size of the accounts receivable.
"That argument makes sense," Hartlieb continued, "and you've got to work with your customer and don't get too caught up in the notion of not losing a customer because one bad debt can wipe out months or years of profits. It's a tough balance."
Pay early and often
For businesses that are the payers, the traditional cash flow approach is to wait until the last minute of the 30-day cycle to pay a bill. Meicher began defying that conventional wisdom as soon as he could because the goodwill engendered from paying bills as early as possible is much more valuable to his business than any advantage gained by keeping money in his account for as long as possible. "Always pay your bills ahead of time, always," he advised. "We pay all of our bills every 10 days. We rush to pay. It doesn't matter who it is. We want people to want to do business with us."
Meicher, who considers the practice a competitive advantage, put all the money he made back into the business until the company was in a position to pay bills early. He recalls the enhanced service he received from the Gordon Flesch Co. when that company was providing maintenance for its copiers. On a Saturday night, Meicher was in trouble because a copier went down and an important deadline loomed on Monday.
"They got someone there on Saturday night, and the reason is not because we're the nicest people always, it's because we pay our bills ahead of time," he said. "When people see that, they want to do business with you. They know that payment isn't a problem and they will bend over backwards for you."
If money is tight, Meicher recommends an order of priority when it comes to paying bills: first, pay your payroll taxes because you can't get rid of those in bankruptcy; second, pay your employees; third, pay the suppliers that provide the goods and services vital to your business.
"People often do not pay payroll taxes because the government isn't there pounding on the door, but those penalties will kill you," he noted.
Hartlieb said it's possible to salvage a stressed relationship with a repayment plan. "It depends on your level of trust in who you are working with to set up payment plans over a period of time," he said. "Payees could potentially take some collateral as a backstop in a worst-case scenario. Actions speak louder than words (for payers), so your ability to win back that trust will depend on how you abide by whatever contract or terms that you work out."
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