David Knoble, CPA, PLLC

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the Working Capital Squeeze

I was review­ing an arti­cle in CFO mag­a­zine titled Cus­tomers Bank­ing on Your Work­ing Cap­i­tal when it struck me how many small busi­ness own­ers rely on cus­tomers pay­ments to make pay­roll.  Work­ing Cap­i­tal is defined as cur­rent assets minus cur­rent lia­bil­i­ties — it refers to what you have to pay what you owe in the short term.  The prob­lem ocurrs when your cash is less than your payables and pay­roll even if you have enough receiv­ables to make up the dif­fer­ence.   So, what do you do?

While the answer is sim­ple, the process is not.  You have to col­lect receiv­ables at a faster rate con­vert­ing them to cash.  Below we present a list for you of some changes you can make in your busi­ness to begin col­lect­ing your receiv­ables more quickly.

Some of these may not fit your typ­i­cal busi­ness prin­ci­ples — small busi­ness like to pride them­selves on supe­rior cus­tomer ser­vice and some of these changes may seem to go against that prin­ci­ple.  Just remem­ber that times are tough and even your loyal cus­tomers will take advan­tage of you if they have to for their sur­vival.  There is always a tact­ful way to ask to be paid and you will prob­a­bly find your cus­tomers will remain loyal to you even when you ask to be paid.

This list is in no spe­cific order, so mix and match or try all of these prin­ci­ples to increase your col­lec­tion rates and con­vert receiv­ables to cash.

  1. Have your sales rep­re­sen­ta­tives clar­ify your pay­ment terms when tak­ing an order.  Tell the cus­tomer directly that your pay­ment terms are 15 days (or what­ever they are) and ask if this will be a prob­lem.  If it later becomes a prob­lem, you can tell your cus­tomer that they com­mit­ted to meet those terms when they placed the order.
  2. Print your pay­ment terms clearly on any order con­fir­ma­tions prior to ship­ping.  Be sure your cus­tomers know your expec­ta­tions prior to pro­vid­ing a ser­vice or send­ing goods.  This gives them a chance to tell you they expected some­thing dif­fer­ent and you can work it out before it becomes a problem.

Review out­stand­ing receiv­ables at least weekly.  Know­ing about prob­lem receiv­ables before they are old is half the bat­tle.  Cus­tomers know when they are pay­ing late and if they think you don’t care then they will squeeze you even harder.  If they know you are on top of your late pays, they will think twice before delay­ing pay­ments to you and delay another ven­dor instead.  The next few items deal with what to do as a receiv­able bal­ance gets older.

  1. The day after a receiv­able was due and remains unpaid, email a state­ment to your cus­tomer.  Be sure to design your state­ments in a cus­tomer friendly man­ner.  Thank the cus­tomer for their atten­tion to this bal­ance and remind them to call you with any ques­tions.  Let the cus­tomer know they can dis­re­gard the state­ment if their pay­ment has crossed in the mail.  Above all, thank them for being a loyal cus­tomer and giv­ing your com­pany busi­ness.  Remem­ber a state­ment is a reminder, not a demand let­ter.  Design your email to your cus­tomer in the same manner.
  2. If an account remains unpaid for a week with no com­mu­ni­ca­tion, then call the cus­tomer.  Have the sales agent call first because of the rela­tion­ship.  As a small busi­ness owner, you can also call.  The per­sonal rela­tion­ship is key.  Remem­ber you are sell­ing to your cus­tomer even though you are try­ing to col­lect.  Ask if there is any prob­lem with your ser­vice or goods.  Ask if they are work­ing well and meet­ing their expec­ta­tions.  Cus­tomers will most likely praise you and if they don’t you will prob­a­bly learn a valu­able les­son about your com­pany.  Then ask if they have sent pay­ment for your ser­vices.  You can remind them of your terms and the fact that you have [already] paid your ven­dors to pro­vide them with their ser­vice / prod­uct.  Ask for a com­mit­ment and fol­low up regularly.
  3. If a cus­tomer can­not pay you every­thing, work out a par­tial pay­ment plan.  Ask for half or one third of your receiv­able.  A par­tial pay­ment is always bet­ter than no pay­ment and will help pay your bills.  Be sure to accu­rately post the pay­ment and reflect the pay­ment on your statements.
  4. If a cus­tomer still remains unpaid, send a weekly or bi-monthly state­ment through email because email is both faster and less costly than the postal ser­vice.  On the first state­ment make sure the cus­tomer knows you will begin assess­ing ser­vice charges.  Whether they pay them is not the issue.  Ser­vice charges tend to add urgency to make pay­ment.  You can always write the ser­vice charges off.  Then, begin assess­ing ser­vice charges.
  5. Hold the next order.  If you can­not get paid then do not con­tinue ship­ping goods or per­form­ing ser­vices.  That may be a harsh real­ity for you because hold­ing orders does not seem cus­tomer cen­tered.  How­ever, it is busi­ness smart and will be the only way you can remain in busi­ness while cash flow is tight.  Buy­ing inven­tory and send­ing it out the door only accel­er­ates you cash going out.  Col­lec­tion of receiv­ables is the only way to accel­er­ate cash com­ing in.  As an alter­na­tive, you can pro­vide COD ser­vice, but that is a per­sonal preference.

Get­ting paid is almost like sell­ing.  You must con­tinue to make con­tact and ask for pay­ment until some­one tells you flatly to leave them alone they will never pay you.  Remain polite at all times no mat­ter how rude the cus­tomer gets.  If they are a good cus­tomer, they are prob­a­bly rude because they want to pay you but they don’t know where the money will come from because they still haven’t made pay­roll.  This is called “reces­sion stress”.

Remem­ber, you have to pay your bills with some­thing and “Cash is King.”  Let me know if you have any ideas as well.

© 2009, david.knoble
by David Kno­ble, CPA, PLLC
Serv­ing Non-Profits, Busi­nesses & Indi­vid­u­als
Rock Hill, SC

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