How to Avoid Cash Collection Problems: Stepping Up Accounts Receivable

Show Me the Money

During an economic downturn, collecting on accounts receivable becomes more important than ever. At the same time, it also becomes more difficult as your customers begin to experience cash flow crunches. However, Vistage speaker Abe “Walking Bear” Sanchez believes that collecting accounts receivable in a timely manner isn’t just about the money. It also affects your reputation and your all-important market share.

“It’s critically important to manage accounts receivable because collections leads to repeat sales,” he explains. “You can’t afford to lose customers during tough times, and one way to keep them is by making sure they stay current on their account with you.

When you let customers go out 90 or 120 days, it creates an embarrassing situation for them. Often, rather than square the account, they put your receivables at the bottom of their payables pile and take their business to a competitor. To justify that decision, they may blame you and start bad-mouthing you to others. So not only have you lost a good customer, your good name is now being dragged through the mud by someone who owes you money!”

To avoid this undesirable scenario and collect on the money you’re owed:

  • Understand why your customers haven’t paid
  • Use a four-step “sales” process to get them to pay
  • Have an efficient A/R tracking system

Understanding Past Due Customers

According to Sanchez, past due customers fit in three categories. When it comes to collecting your money, each requires a different approach.

  1. Slow payers are good, stable customers who have the ability to pay. When they cut you a check, you know
    it will clear. In many cases (especially with large financially sophisticated firms), they pay slowly as a means of practicing cash management. In essence, they use you as a means of short-term financing.

    “The strategy with slow payers is simple — call early and call often,” says Sanchez. “Become the squeaky wheel so they don’t become seriously delinquent and take their business elsewhere. You don’t want to lose these customers, so don’t do anything drastic to jeopardize the relationship. Instead, firmly and politely ask for payment and do your best to keep them current.

  2. Problem payers have either systems or financial problems, with systems problems being the most common.
    Systems problems involve some glitch in the process that prevents the customer from paying. Examples include:

    • Sales disputes
    • Service/price extensions
    • Missing contracts or purchase orders
    • Overages or shortages
    • Unused or misapplied credits
    • Lost paperwork

    “When it comes to accounts receivables, Murphy’s Law works overtime,” says Sanchez. “If anything can go wrong, it will. As soon as you discover a system problem, track it down and fix it immediately. If you let it build for a long time, it can take a lot of reconciliation to collect your money and keep the customer.”

    Financial problems occur when customers don’t have the money. However, they normally don’t come right out and tell you they can’t pay. Instead, they tell you why they can’t pay. Excuses like, “It’s a slow time of the year for us” or “Our customers aren’t paying us” always indicate a financial problem.

    Financial problems can be temporary or serious. With temporary financial problems, the customer doesn’t have the money today but will have it within a reasonable period of time. They generally cooperate, so it pays to work with them and cut them some slack. Be careful about putting short-term problem payers on C.O.D. Unless you are their sole provider, you may drive them to the competition.

    The serious financial problem involves a long-term inability to pay. If a customer hasn’t paid by 60 days and doesn’t have any idea when they will be able to pay, you have a serious financial problem payer. This sends up a major red flag. According to Sanchez, this category runs a 90-percent risk of failure, which means your receivables will likely take a hit.

    “Identify serious financial problem customers as soon as possible,” urges Sanchez. “Never let customers get 120 days out before you discover they are filing for bankruptcy.”

  3. Avoidance payers are customers who deliberately try to avoid payment. They enjoy beating others out of their money. They refuse to cooperate and won’t return phone calls. They lie and blame the problem on your systems. They break arrangements and skip out on you.

    Fortunately, avoidance payers represent the smallest percentage of unpaid collectibles, usually less than one percent of total receivables. Yet, most companies adopt an “enforcement of payment” mindset and spend far too much time and energy chasing this very small category. Identify this group as early as possible and cut them off immediately to limit your loss. Then put them in the hands of a third-party collections professional.

Closing the “Sale”

Once you know what type of customer you’re dealing with, you can take steps to collect your money. Sanchez compares the process to the four steps involved in closing a sale.

  • Contact the decision maker. In collections, the decision maker is the person who can tell you when you will get paid and why. Often, the person who cuts the check doesn’t make that decision. To find out why payment has been delayed, get to the person who decides when payment goes out. Otherwise, you can’t tell what type of customer you’re dealing with.

    Start the conversation by saying, “Hello. I’m Joe Smith from ABC Company. Our records show that invoice #111 dated January 1 is still open. Can you help me with this matter?” Then sit back and listen. The customer will start explaining their reason for non-payment.

  • Determine the type of customer. Ask questions and listen closely to what the customer tells you. Use the conversation as an opportunity to make sure your information is up-to-date. Pay attention to how much the customer cooperates or resists. If they withhold information, you may have an avoidance payer on your hands.

  • Make your presentation based on the type. For slow payers, call early, be consistent and be friendly. Focus your presentation on getting the customer to pay you closer to the agreed-upon terms of sale. If you can’t convince them to pay on time, consider raising your prices in order to maintain margins.

    For systems problem payers, become a detective. Dig up all the facts and fix any problems immediately. For financial temporary customers, express a willingness to work together while selling them on the benefits of continuing to buy from you. Cut financial serious customers off at once. If you continue to do business, put them on C.O.D. only.

    Empathize with their position, but do not extend further credit. Then get on their side of the table and explore ways to improve your position.

  • At this point, you’re competing with every other creditor for the customer’s remaining funds. Shift into full recovery mode and look for ways to improve your position, including:

    • Converting A/Rs to promissory notes with a personal guarantee or additional security
    • Return of product
    • Barter or trade for other products or services

    “At this point, anything is better than a bankruptcy note,” says Sanchez. “Get the debt off your receivables aging and put it on note receivables. It’s important to keep your receivables aging clean because the bank won’t extend credit on anything 60 or 90 days past due. They also see 60 to 90 days accounts receivable as a sign of mismanagement and will charge you higher interest rates for the money they lend you.”

    Put avoidance payers on C.O.D. immediately. The sooner you catch them, the more you can limit your loss. Then send their account to a collections agency or attorney. If the customer owes a lot of money and has assets, hire an attorney on a contingency basis. Otherwise, let a collections agency handle it for a small fee.

  • Close the “sale” and follow up. Get a firm commitment from the customer on when they will
    pay you and use a good contact management system to follow up.

“Fortunately, delinquent customers represent a captive audience. They owe you money so they can’t pretend they’re not interested,” notes Sanchez. “Use this four-step process and you will not only improve cash flow by speeding up A/R collections, you’ll also build relationships with customers and gain a competitive edge as you continually improve efficiency by tracking your systems problems.”

Tracking Delinquent Customers

If you want something done well, do it in a way that you can monitor and measure. To make sure your people contact delinquent customers in a timely manner, Sanchez recommends a daily A/R contact report that tracks four critical areas:

  • Who your A/R person calls each day
  • The outcome of each conversation
  • When you can expect payment from each customer
  • Whether or not customers have paid when they said they would

“In the old days, these reports had to be kept on note cards,” says Sanchez. “Today, you can invest a few hundred dollars, buy a good contact management software program and tracking delinquent A/Rs becomes a snap. The key is to develop the discipline to do it on a daily basis.”

To improve your A/R collections efforts, Sanchez recommends the following:

  • Start early. Contact all delinquent accounts within three to five days of becoming overdue. Waiting 60 or 90 days has a strong negative impact on cash flow. Plus, banks will not lend money against those receivables.
  • Call the largest accounts first. Most companies call their delinquent accounts in alphabetical order. However, 20 percent of your accounts usually represent 80 percent of the dollars. Forget about the alphabet, go after the customers that owe you the big bucks, then work your way down to the smaller accounts.
  • Keep a systems log to track systems problems. Not only does this make it easier to collect your money, it also allows you to constantly upgrade your business processes and become more efficient.
  • Call at the right time. The best time to call commercial accounts is on Monday morning. Start calling personal customers on Thursday and go through Friday, when people usually get paid.
  • Get the right person for the job. Most companies hire accountant-types to handle collections. Unfortunately, those types tend to prefer holing up in their cubicles and working with numbers rather than people. Instead, hire outgoing people who enjoy interacting with others and talking on the phone.

“Effective collections involves having a good system for calling customers and finding out what’s going on,” concludes Sanchez. “Whether it’s you or someone else in your organization, simply pick up the phone and make contact. Call early, call often and ‘sell’ the customer on the benefits of staying current with you. You’ll improve your cash flow, enhance your internal processes, and build stronger, more profitable relationships with your customers.”