Cashflow crisis survival guide: How to get your customers to pay on time

Business confidence is in the pits, and yesterday, we found out why.

According to the latest Dun & Bradstreet data, businesses are now waiting 54 days to be paid, which is up from the 53 days they waited during 2011 and 2012.

The nearly eight-week wait means money isn’t on hand for small businesses to pay their own bills, and is in effect is an interest-free loan to your customers. As D&B chief executive Gareth Jones put it, it’s a “vicious cycle”.

“When one business pays late, it can force the other to delay its own payments until it has money available. This pattern appears to be at play within the business community at the moment.”

While average payment times do go up and down with economic stress, there are things you can do to get your customers to pay quicker.

“You need to give it the age-old carrot-and-stick treatment,” says Schon Condon, of insolvency and turnaround firm Condon Associates. “Try and build in some carrots to induce, and some sticks to prevent late payment.”

SmartCompany rang around the experts this morning. Here are their tricks of the trade:

Check your terms of trading

Roger Mendelson heads up Pruska Fast Debt Recovery, which is the largest debt-collection agency serving SMEs in Australia.

He says his company has seen a spike in business over the past 12 months, which shows the pressure businesses are under when it comes to late payment.

Asked what the biggest mistake is he sees companies make, he nominates them not having debt-recover-friendly terms of trading in place.

“What these contracts do is set out really clearly what the terms of doing business are,” he says.

“An important clause to have in there is that in the event of a default, if the account is outsourced to a collection agency or law firm, all collection costs get added to the debt.

“If you have that in place, you have a real lever with the customer. You can say, ‘if we don’t get paid this week, it’ll be sent to a collection agency, and under our terms, you’ll become liable for our costs’.”

The important function of such clauses is to impose a penalty for late payment. People who fail to pay their bills on time, Mendelson says, tend to prioritise what to pay first based on the penalties. So, they’ll pay a phone bill if not doing so leads to their phone line being cut, or they’ll pay their credit card bills to avoid the interest. “By virtue of having a clause saying they’ll incur collection costs, your bill goes into the bucket of bills they do pay early.”

Some industries, but not all, can do things like limit warranties and replacements if bills aren’t paid promptly, Condon adds.

“Plenty of businesses put in their terms of trade that their guarantee is voided if you don’t pay on time,” he says.

“Now, if you’re selling motorcars or things like that, there are statutory obligations you have to meet with things like warranties, and you can’t contract out of those. But in a lot of industries, it’s a good inducement for prompt payment.”

Some companies offer discounts for early payments (10% off, 20% off your next purchase), which can induce early payment but are also a cost to be borne by the business. Any such models need to be built into your pricing structure so they don’t end up costing you more, Condon says.

Know your clients – bust out the forms

The more information you have on your clients and customers, the more likely you are to be able to pursue them for payment, Mendelson says.

“For new credit customers, get your customer to complete a ‘new client application form’. This will provide you with all the information you need to know things like how long they’ve been in business, or what the name of their entity is, and whether it’s a trust, partnership or company.

“That will provide you with a profile of the customer. And in the event of default, you’ve got a lot of very valuable information that you can use to actually find the debtor, and to work out what is the best action to take.”

For larger orders, it’s important to credit-check your clients and make a prudent choice about whether or not to take their business.

“Small businesses should absolutely say no to people they don’t think will pay. And they should probably do that more often,” says Gary Green, the national sales director of Bibby Financial Services.

“A sale isn’t really made until you collect the cash.”

What do you reward?

If your business uses salespeople, it’s important to make sure you’re rewarding sales that bring you money as opposed to sales that don’t.

If your sales staff are paid commission on merely booking the service, that can lead to them ‘bending the rules’ to get a client over the line. If they’re paid a commission when the money clears, they have every incentive to bring in good, dependable clients.

Spread your customers

Often, the people giving small businesses the greatest grief work in government or for large companies with a lot of market power.

For this reason, it’s important to diversify your client base so you’re not reliant on one large government department to deliver on time, Green says.

“It’s the savvy thing to do,” he says.

A bill not paid at 90 days won’t be paid at 120

Businesses that are too lenient with late bills lose all their credibility.

If someone hasn’t paid in 90 days, they’re unlikely to do so at 120, Mendelson says.

“If you keep waiting until a certain point, you’ve just lost credibility, which makes it harder to collect. My advice is to deal with it, yourself or by outsourcing, fairly early in the piece.”

Instead of waiting around hoping for the best, businesses should know when to bring in the big guns, Green says.

“It’s amazing what can happen when you issue a letter demanding payment on a legal letterhead,” Green says. “Payment usually follows soon after.”

If a bill is late, get on the phone

Green says the biggest mistake he sees small businesses make when it comes to chasing up invoices is assuming the best and not chasing up their clients for payment.

“Often, you even see a reluctance to follow up invoices,” he says. “Business owners are very busy, and typically surviving as opposed to thriving. They’ve got a lot on their plate, and it can be a difficult conversation.

“But you can limit the conversations by issuing invoices on time, and automatically following them up. When you deliver a product or good, deliver the invoice immediately. Start the clock ticking. And at 14 or 30 days, follow it up.

“A lot of the reason bills stretch out is because of that lack of follow-up.”

If a bill is late, it’s time to have a personal conversation. And this can be more useful than you think.

“If there’s a dispute with the bill, you need to know early in the piece,” Mendelson says. “That way, if it’s genuine, you can do something about it.

When a bill is late, it’s crucial that someone in your company is talking to the client early to find out what the problem is.

The question asked shouldn’t be ‘when will you pay up’. It should be: ‘is there any reason this bill has not been paid?’

“Often, by the time an account gets referred to us, people will say, ‘oh, I wasn’t happy with the service so I’m not going to pay’. It’s better to find that out early. If they don’t raise it then but it gets raised further down the track, you know it’s just a tactic to defer payment rather than a genuine problem with your service.”

Who should do it? Maybe not you

Getting on the phone and asking questions about payment isn’t something everyone loves to do. If you want it done right, you can’t just leave it to your receptionist or book-keeper to handle.

“If it’s something they don’t want to do, they just won’t do it,” Mendelson says. “They’ll just send out statements every month because that’s easy to do. But it’s not what brings in the money.”

The key to getting your bills paid on time is to find someone within your business who likes getting on the phone and calling, or who views it as a challenge.

“Every business will have someone who’s quite strong-willed, who can communicate well, who is forceful but not rude. And that’s the person who’ll want to do it. They’ll find it a personal challenge to get a result.”

“It really comes down to finding out if this is something you or your people would like to do, rather than something you or they are prepared or forced to do.”