Managing Receivables—Dial softly, and carry a big stick

This post originally appeared on Crain’s Detroit Business
Here we are three months into the New Year already. The holidays are over, people have dug out of their Christmas spending binges, and clients are now all caught up on the payments to your business—right? Unfortunately, unless you are running a C.O.D. business, you’re probably feeling the same slow down on cash flow that the rest of us are experiencing. What’s worse, it doesn’t seem to matter how well we service our clients. They can’t pay us because they are in the same boat—or worse.
What’s a Stage 2 company to do? At the outset, you must decide if the business is worth it. Are the margins that each of your clients generate enough to compensate you for the “carry” of waiting to get paid? If you’re acting like your client’s banker, it is a real expense that has to be factored into your cost of doing business.Assuming you want to keep the customer, how can you ensure that net 10 or net 30 doesn’t turn into net 60, net 90 or worse? Well, as the old saying goes “the squeaky wheel gets the grease”.
First, remind customers in very clear terms what your payment terms are, and get them to recommit to honoring those timelines before the next customer order is filled—ideally, in writing (e-mail does count). Second, if you wait until the customer is “past due” on your invoice to reach out to them regarding payment, you’re already too late. Start calling about 1-2 weeks before payment is due, and inquire as to when payment can be expected. Obviously, you want to be low key about it. However, they need to understand you expect prompt payment in exchange for the outstanding goods and/or services you offer.
Of course, if you start to get strung along, you’ve got to dig deeper. Find out why there is a delay. Will the client commit to a date certain? Will they offer collateral, a guaranty or some form of “security”? If not, it might be time to “squeak more loudly”. Of course, if the customer is looking for new orders to be filled, but is past due on old invoices, you really are at the cross-roads. Do you double down and hope it works out, or do you withhold the new work until the old invoice is cleared up? This is never an easy decision (isn’t small business ownership fun?). In reality, each customer relationship is unique, and there is no one size fits all solution. However, it’s times like these when consulting your accountant or lawyer for their input is strongly encouraged. In my experience, nothing kills a business faster than failing to properly manage your receivables.
So, as we move forward, keep your eye on those past due invoices, and keep the key pad on your telephone well oiled. You’re going to be calling a lot more often over the next few years as we continue to work through this challenging period.
Disclaimer: This post is intended as the author’s personal opinion only, and is not the presentation of legal advice.