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Manage Receivables to Generate Cash

When your company manufactures a product, or performs a service for a customer, you are often expending funds on their behalf, well ahead of getting paid. Partly, that’s the cost of doing business. But it’s prudent to minimize the amount and time of that “loan”. Doing so is one of the keys to translating earnings, however they are measured, into cash. Not only freeing up cash for use in the business, but reducing costs to enable generation of even more cash.

Background Assumptions

Let’s say that your business generates $10,000,000 annually in Sales. Payment terms are mostly Net 30 days. If Receivables management has not been a priority, it would not be uncommon to see an average “Days to Pay” (DTP) of 50 days. What does this cost? We’ll assume that your cost of money is 5% annually, and if you are offering standard terms of net 30 days, you are accepting as an annual cost, the almost $42,000 in interest or lost interest if all your customers pay exactly on time. Actually, your interest costs can be a lot more, since this clock doesn’t start until you issue an invoice, which can be after you have expended most or all of your costs on the project, using your own or borrowed money.

Delayed Payments Cost Your Company

If you let your DTP creep up to 50, your interest cost rises by about $30,000 a year. If this number doesn’t get your attention, consider these additional reasons for getting the DTP down to a lower level:

  1. Often times, customers may withhold payment due to problems. These may be invoicing problems, or may be quality or other issues on the deliverables. Proactively addressing invoicing issues can help you uncover these items early, leading to improved customer satisfaction.

  2. At some point, the cost of money will go back up. Better to fix your billing and collection processes now, not when money costs 10-15% or more, and we are looking at really large dollars.

  3. The quicker you collect, the less likely the chance for default.

Simple Tactics to Speed Up Payments

Get billing out the door right away – Establish a policy of issuing the invoice within 24 hours of your contractual ability to do so. Work with your team to identify and eliminate any obstacle to this happening. See below regarding job folders and receipts for a few common hurdles and how to overcome them.

Standardize job folders – Even if someone is out of the office, it will be easy for a substitute to find the documentation necessary to issue the invoicing. Mandate that the supporting documentation, such as vendor invoices, employee timesheets, travel expenses, shipping invoices, etc are routinely and quickly put into the folder, in the appropriate section.

Negotiate away from receipts requirements – even on “time and materials” jobs, see if you can get the client to accept fixed charges for items that would normally require receipts (per diems for living expenses, for example, or published rates for shipments with UPS or FEDEX). Receipt requirements offer too many reasons for payment to slip. It delays getting the bill out the door in the first place, waiting on vendors to provide their own invoices, or employees to turn in their travel receipts.

Hire stay at home relationship managers – Not only can using your sales people for bill collection harm your customer relationship, it takes them away from the sales effort. And customers really don’t want to hear from collection agents or agencies. A better idea is to set up 1 or more “Customer Payables Relationship Representatives.” Find new mothers, perhaps, wanting to stay at home with their children, who are looking for something to do. Preferably, ones with good business experience, in sales or financial roles. Task them with developing and maintaining relationships with the key Payables personnel in customer organizations. They will make regular contact, whether or not the customer has overdue receivables to your company. They can proactively check on the status of invoices that are coming up to a due date. Is all the documentation in order? Have the proper personnel inside the customer organization signed off? Is the quality acceptable? These representatives will need internet access to your company receivables system, as well as access to some of your staff, to help them resolve invoicing issues. Let them work as few hours a week as they wish, and pay them on an hourly basis. For the ability to set their own hours and work from home, this is often doable for $20-25 per hour.

Negotiate shorter terms of payment – Who says that you must offer 30 days to pay? Why not start including standard proposal language requiring payments of net 15 days? How likely is it that your proposal will be thrown out just based on this change, if your price, delivery, and quality are competitive or even superior to the competition? Some customers will accept the terms, others will call to object, and you can then decide whether to concede. Very few will disqualify you.

Ask for progress payments – this can include cash up front, especially if its obvious that your company will be making large expenditures for purchased material or subcontracts to incorporate in your product. In this regard, tie the payments to specific dates, rather than job milestones, which can often be a point of contention (what does 55% complete really mean?)

Offer low discounts for quick pay – even if you keep your standard payment terms at 30 days, offer a small discount for payment in 7 days. Many organizations have a policy of taking the discount regardless of the amount, so keep it to a very small number – the higher it is, the more money you lose, and gain little advantage in the customer’s decision to act on it. When interest rates are low, like at present, financially, it’s not worth it to you to offer the discount. But it may train customers to pay more quickly, minimize the chance of default, and offer other intangible benefits to get your cash more quickly.

What other approaches have worked to get your overdue receivables balance down, or to decrease the number of days that your customers take to pay?

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