“If you have to sell on credit, you need to focus on turning those receivables into cash as soon as you possibly can.”
Watch Your Receivables
My father spent over 30 years of his career in banking, loaning money to all kinds of small businesses. The advice he gives me more than any other is “Watch your receivables!”
One of the first business terms I learned when I started extending credit to other businesses was “net 30.” It really means that if you send out lots of reminder notices and call repeatedly to demand payment, you’ll probably get paid in 90 or 120 days.
I recently heard about one firm that puts an X mark on each invoice it owes, every time a creditor calls up demanding payment. When a total of three Xs have been noted on it, the invoice gets paid.
The Fastest Way to Get Cash
At Adams Media, my accounting staff grew to include a full-time credit and collections manager, an accounting manager, and a controller, along with a bunch of other people. But, I always made sure that I was personally keeping tabs on at least the big picture or any serious issues with receivables. You should keep personal tabs on your collection’s big picture, too.
One quick way to get a grasp on the situation is to look at the average days outstanding. Another is to look at an aging summary that shows how much in receivables is less than 30 days outstanding; 30 to 60 days outstanding; 60 to 90 days outstanding; 90 to 120 days outstanding; and over 120 days outstanding.
I’ll personally review the aging summary at least once per month. At least every couple of months, I’ll personally review individual problem accounts with the collections manager to make sure that we’re being as aggressive as we can be in getting paid.
Collecting overdue bills is almost always the number one quickest way to improve your cash flow. The sooner you collect overdue receivables, the better your chance of collecting them at all.
When They Can’t Pay You
What do you do when customers say they can’t pay you? If you’re collecting from an individual or a small business, give them the option of paying by credit card. If that doesn’t work, ask for a partial payment. Perhaps you can get the customer to agree to a regular payment plan—this often works for us. If you can’t get any money today, try to at least get a promise of a specific date on which you can expect to receive the check.
What about taking the customer to court? I have successfully collected thousands of dollars in small claims court. But it is a very time-consuming process, and the outcome is never certain. To go to a regular court, you’ll need lots of money for legal fees and lots of patience to wait for your court date. Furthermore, even if you successfully win a judgment in court, that still doesn’t mean you are necessarily going to get paid. The deadbeat might wait for further legal action, decide to disappear, or simply not have enough money.
Once a customer has finally decided to pay your bill, it typically takes quite a while to actually get the funds into your account. Ideally, what you’d like your customers to do is wire you payment. I am often able to get overseas customers to pay by wire—this saves not only the time waiting for an overseas letter, but also the extra time banks take to make available funds drawn on foreign banks.
But I’m not able to get my U.S. customers to pay by wire. So for my larger customers, rather than wait for the mail, I’ll give them our FedEx or other overnight courier number and have them send payment at our expense.
Lockboxes Work Wonders
One basic way to speed receivables is to use a bank’s lockbox. Instead of customers mailing payments to you, they mail them to the P.O. box of a bank, which some banks may check as often as every hour of the day. The funds go into your account immediately, and then, afterward, the bank sends you the accompanying paperwork so that you can properly credit each payment. When we switched to a lockbox we also benefited by using a bank in Boston that gets its mail a day or two faster than we did in our small town. The bank will charge you for a lockbox, so run the numbers to make sure it’s financially feasible, but even many very small businesses will find it highly worthwhile.
Of course, you can have customers electronically transfer you funds to get them even faster!