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In the 5 minutes it will take you to read this article 56 new businesses will file for bankruptcy according to statistics from the US Bankruptcy court.
** In the two years leading up to America's current banking crisis, business bankruptcy filings had
already increased by 81%.
** Nearly 60% of small businesses surveyed by the US Treasury Dept. in F4Q 2008 reported that their revolving lines of credit had been either cancelled or restricted within the previous 120 days.
** 3.4 million jobs have been shed in the past 12 months as businesses struggle to bring expenses in line with revenue.
** Intense pricing competition spurred by decreased consumer spending is eroding profit margins in many industries.
This cascade of events has created a business phenomenon that I refer to as VENDOR-LENDOR SYNDROME, in which the lines between your company's actual credit terms and the cash needs of your customer blur. Put simply, if a company has $20,000 in available AP but has $30,000 in vendor receivables due this month, someone has to lose - the losers are, in fact, financing the payments that are made.
Bottom line, in this economy your AR personnel are facing the same stiff competition that your salespeople
face, only after the sale.
The reality for every business that provides its products or services on an open credit basis is that a sale isn't complete until payment is received. Obviously, the sooner your invoices are paid the healthier your cash flow will be. So, the challenge lies in finding ways to maximize your accounts receivable to the benefit of your cash flow without alienating your customers in the process.
# 1 CREATE A FORMAL POLICY
Any discussion about minimizing your invoice-to-payment cycle, commonly known as your company's DSO, must begin with an examination of the internal policies that drive your company's customer communication and collection efforts. In fact, two of the top 10 most common reasons that businesses struggle with internal collection efforts are 1) the absence of a formal collection policy and, 2) lack of expertise or training for AR staff tasked with recovery.
I once heard a colleague say to a group of business owners attending a conference on best practices: "If you don't have a formal collection policy, don't worry, your customers will write one for you...although you may not like the terms they give themselves".
Obviously his comment was meant tongue in cheek. However, hidden within the humor is a powerfully simple message that becomes even more prophetic in a worsening economy. Designing an effective collection policy does not need to be an overly complicated endeavor, especially when you remind yourself that collecting customer AR is nothing more than a different form of customer communication. Your efforts should incorporate the three basic aspects of effective communication that you probably already use in your initial sales process; Continuity of contact, consistency of message, and solicitation of feedback.
The simplest way to approach this is to treat your AR personnel like they were new salespeople for your company, even to the extent that they should be assigned collection goals or quotas.
When employees don't know what to do next, they often do nothing at all"
To ensure proficiency, management should provide all AR personnel with:
1. An action timeline that outlines what steps to take at specific intervals in the process
2. Pre-formatted letter templates
3. Call scripts to guide them through their customer contacts
4. Training on how to resolve pricing or product disputes
5. Guidelines for establishing partial payment arrangements to keep cash flowing from
customers with financial difficulties
Like any other skill set, AR personnel will also benefit greatly from initial and ongoing training and practice sessions. Training does not need to be any more complicated than reaffirming:
1. What actions should they take
2. At what point in time
3. The proper tone for each call
4. What is their goal at each step
These simple steps will reduce your DSO and ensure a uniform customer experience during the collection process to avoid customer alienation.
#2 PRICING DISCOUNTS
Some savvy business managers have recently begun revisiting a tried and true payment incentive in the form of dynamic pricing discounts, otherwise known as early payment discounts. In essence, vendors utilizing this strategy provide their clients with a financial incentive to pay early. The most common enticement is the 2% 10day-Net 30. This arrangement provides customers with the ability to take a 2% discount if the invoice is paid on or before 10 days from the date of sale. Some basic math demonstrates that this 2% discount is equivalent to a 36% return for customers that buy often and regularly take advantage of this offer.
Even a 1% discount will provide your customers with an 18% rate of return. The real power of this strategy is that it allows you the flexibility of discounting some or all of your receivables. Even if you cherry-pick the clients to which this offer is extended (best credit/largest volume) you can bolster your cash liquidity and strengthen your customer loyalty.
# 3 INVOLVE SALES STAFF
In most cases the person within your organization that has the best rapport with your customer is your sales representative. In fact, there is generally no person better situated to demonstrate to prospective and
current customers the value of early payment discounts. Similarly, a salesperson with strong client rapport can be a company's best collection leverage when there is a noticeable shift in a customer's historical payment pattern. Salespeople that make face to face sales calls have the added benefit of being able to visually inspect your customer's showroom or warehouse.
Are there suddenly a new supplier's products on the shelves while your invoices have aged beyond terms? Train your sales staff to be your eyes and ears in the field and you'll be amazed by how their surveillance will help you improve customer relationships...and your cash flow. Just like your AR personnel, your sales team will benefit from additional training on credit worthiness and customer payment patterns. You can further press the point home by introducing a program to "charge back" sales commissions on accounts that age 60 days or more past terms.
# 4 STREAMLINE PAYMENTS
"The check's in the mail"
We've all heard this one a million times. In fact, when I conduct cash flow audits for my clients one of the first things I inspect is their methodology for collecting payment. Sadly, in most cases I find that the common postage stamp is still king of their cash flow. Think about it this way... by its very nature, snail mail adds 3-5 days to your DSO from the time your customer actually signs your check! Since your goal is to minimize your DSO, you will need to go in another direction.
"American businesses lose billions of dollars in cash flow each year due to delayed customer payments...and they are doing it.44 cents at a time"
To learn more I recently interviewed Bill Pette of Regal Technologies (www.regaltek.com) based out of Severna Park, MD. His company is one of the nation's leading providers of hosted payment solutions, which are secure online payment pages managed and hosted by a third party. According to Mr. Pette, "This type of payment solution allows companies to accept credit card and ACH (electronic business check processing) payments from their customers 24/7. Not only does this allow them to avoid mail delays, but the ACH process also clears checks and funds their account up to 80% faster than brick and mortar banks...all from their current website"
Beyond the customer convenience of truly being able to pay today, there is also a substantial cost saving potential for companies that currently process a large amount of credit card payments. As opposed to losing 2-3% of your gross revenue to credit card processing fees, ACH providers generally only charge.25 to.30 cents per item to clear a check electronically regardless of the check amount. Beyond the per-item transaction fee, you should expect to pay a low monthly account fee around $50-$75, making this type of service a bargain no matter who does the math. Even checks that do still show up via snail mail can be converted and cleared electronically without the need to ever deposit the physical check. For customers that you put on payment plans, you can even set up a recurring charge/debit by using a simple, singlepage
authorization form. As they say on TV, "set it (once) and forget it". As you might imagine, there are a number of legal mandates and compliance issues that oversee this type of transaction, which is why it's almost universally an outsourced service.
# 5 MONETIZE YOUR INVOICES
Also known as accounts receivable financing, this business concept traces its roots back to the mid 18th century according to a recent article published by The Wall Street Journal, which states: "For hundreds of years, cash-strapped companies have hired people or companies known as factors to advance them funds based on money owed by customers. But with interest rates sometimes exceeding 30% or 40% annually and tales of unsavory business practices, this small corner of finance is considered by many to be a funding source of last resort."
However, a new wave of tech-savvy entrepreneurs have revolutionized this outdated concept and turned it into a gold mine for companies who want to bolster their cash flow. These services have found a devoted following, particularly in the small to mid-sized business segment where companies have the hardest time obtaining traditional revolving lines of credit. Among the leaders of this reinvented industry is a New Orleans-based company, The Receivables Exchange. Company executives describe their business model as "eBay for receivables" as their online auction format borrows heavily from the familiar eBay bidding and "buy it now" features. In its new incarnation, companies can select as few or as many invoices at a time to post on TRE's online auction website for funding. These receivables are then bid on anonymously by a group of fully vetted funding sources which include hedge funds, mutual funds, and private equity groups that have been drawn to the exchange by the low risks involved. These auctions tend to close quickly -
many on the first day - and all auctions are concluded within 72 hours. Funds are then wired to the seller the very next business day. The costs to the seller generally average only 3-4%, which makes this option both convenient and affordable. Most importantly, all transactions are completely transparent to the seller who has the ability to set minimum and maximum parameters and the customer whose invoice was used for financing is never made aware of that fact.
FINAL THOUGHTS
While each of the suggestions previously outlined has the ability to impact your cash flow, there will always be a small percentage of customer accounts that won't respond to your enticements or recovery efforts. That's when most companies traditionally enlist the assistance of a 3rd-party collection agency, and there are literally thousands of agencies in the nation to choose from. Most vendors consider collection agency involvement as an action of last resort because of the high agency commission rates (generally 30-50%) and the intrinsic damage to their customer relationships caused by agency threats and harassment.
"Your financially distressed customers need a solution, not harassment"
However, recent years have seen an emergence of a new generation of innovative agency owners that are divesting from traditional collection tactics in favor of recovery strategies that are more solution-based from the "debtor" perspective. This tact reduces the adverse affect on your customer relationships and can dramatically increase overall collection success rates.
** In the two years leading up to America's current banking crisis, business bankruptcy filings had
already increased by 81%.
** Nearly 60% of small businesses surveyed by the US Treasury Dept. in F4Q 2008 reported that their revolving lines of credit had been either cancelled or restricted within the previous 120 days.
** 3.4 million jobs have been shed in the past 12 months as businesses struggle to bring expenses in line with revenue.
** Intense pricing competition spurred by decreased consumer spending is eroding profit margins in many industries.
This cascade of events has created a business phenomenon that I refer to as VENDOR-LENDOR SYNDROME, in which the lines between your company's actual credit terms and the cash needs of your customer blur. Put simply, if a company has $20,000 in available AP but has $30,000 in vendor receivables due this month, someone has to lose - the losers are, in fact, financing the payments that are made.
Bottom line, in this economy your AR personnel are facing the same stiff competition that your salespeople
face, only after the sale.
The reality for every business that provides its products or services on an open credit basis is that a sale isn't complete until payment is received. Obviously, the sooner your invoices are paid the healthier your cash flow will be. So, the challenge lies in finding ways to maximize your accounts receivable to the benefit of your cash flow without alienating your customers in the process.
# 1 CREATE A FORMAL POLICY
Any discussion about minimizing your invoice-to-payment cycle, commonly known as your company's DSO, must begin with an examination of the internal policies that drive your company's customer communication and collection efforts. In fact, two of the top 10 most common reasons that businesses struggle with internal collection efforts are 1) the absence of a formal collection policy and, 2) lack of expertise or training for AR staff tasked with recovery.
I once heard a colleague say to a group of business owners attending a conference on best practices: "If you don't have a formal collection policy, don't worry, your customers will write one for you...although you may not like the terms they give themselves".
Obviously his comment was meant tongue in cheek. However, hidden within the humor is a powerfully simple message that becomes even more prophetic in a worsening economy. Designing an effective collection policy does not need to be an overly complicated endeavor, especially when you remind yourself that collecting customer AR is nothing more than a different form of customer communication. Your efforts should incorporate the three basic aspects of effective communication that you probably already use in your initial sales process; Continuity of contact, consistency of message, and solicitation of feedback.
The simplest way to approach this is to treat your AR personnel like they were new salespeople for your company, even to the extent that they should be assigned collection goals or quotas.
When employees don't know what to do next, they often do nothing at all"
To ensure proficiency, management should provide all AR personnel with:
1. An action timeline that outlines what steps to take at specific intervals in the process
2. Pre-formatted letter templates
3. Call scripts to guide them through their customer contacts
4. Training on how to resolve pricing or product disputes
5. Guidelines for establishing partial payment arrangements to keep cash flowing from
customers with financial difficulties
Like any other skill set, AR personnel will also benefit greatly from initial and ongoing training and practice sessions. Training does not need to be any more complicated than reaffirming:
1. What actions should they take
2. At what point in time
3. The proper tone for each call
4. What is their goal at each step
These simple steps will reduce your DSO and ensure a uniform customer experience during the collection process to avoid customer alienation.
#2 PRICING DISCOUNTS
Some savvy business managers have recently begun revisiting a tried and true payment incentive in the form of dynamic pricing discounts, otherwise known as early payment discounts. In essence, vendors utilizing this strategy provide their clients with a financial incentive to pay early. The most common enticement is the 2% 10day-Net 30. This arrangement provides customers with the ability to take a 2% discount if the invoice is paid on or before 10 days from the date of sale. Some basic math demonstrates that this 2% discount is equivalent to a 36% return for customers that buy often and regularly take advantage of this offer.
Even a 1% discount will provide your customers with an 18% rate of return. The real power of this strategy is that it allows you the flexibility of discounting some or all of your receivables. Even if you cherry-pick the clients to which this offer is extended (best credit/largest volume) you can bolster your cash liquidity and strengthen your customer loyalty.
# 3 INVOLVE SALES STAFF
In most cases the person within your organization that has the best rapport with your customer is your sales representative. In fact, there is generally no person better situated to demonstrate to prospective and
current customers the value of early payment discounts. Similarly, a salesperson with strong client rapport can be a company's best collection leverage when there is a noticeable shift in a customer's historical payment pattern. Salespeople that make face to face sales calls have the added benefit of being able to visually inspect your customer's showroom or warehouse.
Are there suddenly a new supplier's products on the shelves while your invoices have aged beyond terms? Train your sales staff to be your eyes and ears in the field and you'll be amazed by how their surveillance will help you improve customer relationships...and your cash flow. Just like your AR personnel, your sales team will benefit from additional training on credit worthiness and customer payment patterns. You can further press the point home by introducing a program to "charge back" sales commissions on accounts that age 60 days or more past terms.
# 4 STREAMLINE PAYMENTS
"The check's in the mail"
We've all heard this one a million times. In fact, when I conduct cash flow audits for my clients one of the first things I inspect is their methodology for collecting payment. Sadly, in most cases I find that the common postage stamp is still king of their cash flow. Think about it this way... by its very nature, snail mail adds 3-5 days to your DSO from the time your customer actually signs your check! Since your goal is to minimize your DSO, you will need to go in another direction.
"American businesses lose billions of dollars in cash flow each year due to delayed customer payments...and they are doing it.44 cents at a time"
To learn more I recently interviewed Bill Pette of Regal Technologies (www.regaltek.com) based out of Severna Park, MD. His company is one of the nation's leading providers of hosted payment solutions, which are secure online payment pages managed and hosted by a third party. According to Mr. Pette, "This type of payment solution allows companies to accept credit card and ACH (electronic business check processing) payments from their customers 24/7. Not only does this allow them to avoid mail delays, but the ACH process also clears checks and funds their account up to 80% faster than brick and mortar banks...all from their current website"
Beyond the customer convenience of truly being able to pay today, there is also a substantial cost saving potential for companies that currently process a large amount of credit card payments. As opposed to losing 2-3% of your gross revenue to credit card processing fees, ACH providers generally only charge.25 to.30 cents per item to clear a check electronically regardless of the check amount. Beyond the per-item transaction fee, you should expect to pay a low monthly account fee around $50-$75, making this type of service a bargain no matter who does the math. Even checks that do still show up via snail mail can be converted and cleared electronically without the need to ever deposit the physical check. For customers that you put on payment plans, you can even set up a recurring charge/debit by using a simple, singlepage
authorization form. As they say on TV, "set it (once) and forget it". As you might imagine, there are a number of legal mandates and compliance issues that oversee this type of transaction, which is why it's almost universally an outsourced service.
# 5 MONETIZE YOUR INVOICES
Also known as accounts receivable financing, this business concept traces its roots back to the mid 18th century according to a recent article published by The Wall Street Journal, which states: "For hundreds of years, cash-strapped companies have hired people or companies known as factors to advance them funds based on money owed by customers. But with interest rates sometimes exceeding 30% or 40% annually and tales of unsavory business practices, this small corner of finance is considered by many to be a funding source of last resort."
However, a new wave of tech-savvy entrepreneurs have revolutionized this outdated concept and turned it into a gold mine for companies who want to bolster their cash flow. These services have found a devoted following, particularly in the small to mid-sized business segment where companies have the hardest time obtaining traditional revolving lines of credit. Among the leaders of this reinvented industry is a New Orleans-based company, The Receivables Exchange. Company executives describe their business model as "eBay for receivables" as their online auction format borrows heavily from the familiar eBay bidding and "buy it now" features. In its new incarnation, companies can select as few or as many invoices at a time to post on TRE's online auction website for funding. These receivables are then bid on anonymously by a group of fully vetted funding sources which include hedge funds, mutual funds, and private equity groups that have been drawn to the exchange by the low risks involved. These auctions tend to close quickly -
many on the first day - and all auctions are concluded within 72 hours. Funds are then wired to the seller the very next business day. The costs to the seller generally average only 3-4%, which makes this option both convenient and affordable. Most importantly, all transactions are completely transparent to the seller who has the ability to set minimum and maximum parameters and the customer whose invoice was used for financing is never made aware of that fact.
FINAL THOUGHTS
While each of the suggestions previously outlined has the ability to impact your cash flow, there will always be a small percentage of customer accounts that won't respond to your enticements or recovery efforts. That's when most companies traditionally enlist the assistance of a 3rd-party collection agency, and there are literally thousands of agencies in the nation to choose from. Most vendors consider collection agency involvement as an action of last resort because of the high agency commission rates (generally 30-50%) and the intrinsic damage to their customer relationships caused by agency threats and harassment.
"Your financially distressed customers need a solution, not harassment"
However, recent years have seen an emergence of a new generation of innovative agency owners that are divesting from traditional collection tactics in favor of recovery strategies that are more solution-based from the "debtor" perspective. This tact reduces the adverse affect on your customer relationships and can dramatically increase overall collection success rates.
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