How’s your company’s cash flow right this minute? To get your money in the door more promptly pumping up your cash position, take these proactive actions:
Shorten Terms – For competitive reasons, many family businesses are reluctant to shorten terms for fear of losing existing customers as well as perceived additional difficulty obtaining new customers. History shows however, these concerns are typically unfounded.
In marketplace after marketplace, once a single company shortens terms, others follow and the competitive landscape quickly stabilizes.
To keep existing customers and not lose a single account through terms tightening, communication is key. Large accounts deserve a face-to-face personal sales call about the new terms. When sales personnel carefully explain to customers that it’s shortened supplier terms that necessitate shortened customer terms, customers are empathetic more often than not. Smaller accounts can be handled by phone. Mass mailings are typically ineffective and can be harmful if they get into the hands of unscrupulous competitors.
Also, consider shortening terms only for certain class of trade customers. Agricultural accounts can be the toughest to deal with in your customer base. You may want to research the availability of farm credit plans in your area. These plans, such as those offered by John Deere, allow you to be paid immediately. The farm plan then collects from the customer. Before instituting any farm plan, be sure you read the fine print, particularly any clauses about non-collectible accounts. Some plans shift the receivable back to you if they can’t collect the account within 90 days.
Offer ACH Draft Incentives – When the problem is not customer payment terms, but just customers not paying according to terms, the key is transitioning check-paying, slow customers onto ACH draft payments. With drafts, they cannot delay payment. Of course, they know this too, so it may take an incentive to get them to switch to drafts. Owners report success using two different incentive strategies. The first strategy is to offer a one-time perk. One that has been particularly effective is to offer a discount on the next purchase. You can also consider a “thank-you” gift certificate, good towards any of your products or services.
A second strategy entails offering longer terms to ACH users than check-payers. For instance, you might currently provide net 10-day customer terms, but offer ACH drafts at net 12. By drafting on day 12 you will still have cash in the door earlier than if customers continued to pay by check.
Billing Accuracy – As you move to ACH dominance in collections, billing accuracy is paramount. Conduct a random sample audit of your billings. Are invoices correct 100% of the time? If not, you will need to improve invoice quality and accuracy before moving to an all draft system.
New Accounts –Make sure the ACH requirement is clearly stated on new account applications and the ACH authorization is a standard form required of all new accounts.
Remember, however, that ACH does nothing for you when there is no money in a customer’s account. Although an ACH draft will receive priority over checks when money does finally appear in the customer account, you will still receive nothing when there isn’t any money! Credit policy should not become lax just because draft collections have been instituted. Therefore, continue to set credit limits based upon customer cash availability and credit worthiness.
Existing Bad Accounts – Don’t give up on your bad accounts even though you may have an aggressive write-off policy. Many family businesses use collection agencies to collect what was thought to be uncollectible accounts with success. Talk to other businesses in your area about the availability and quality of local collection account services. Although some marketers handle bad debt collections internally, most do not have the expertise or effectiveness of a professional debt collector.
In summary, get receivables in the door more quickly to boost your company’s cash position.
