Hardly anyone in the industry pays with cash anymore, so here’s how to make sure those payments keep coming from your credit extensions.
By William Atkinson
Atkinson is a freelance journalist who specializes in business and safety issues.
A favorite saying of one businessman is “We’re always in the state of fraud until the check clears.” Very few business-to-business transactions occur these days with cash. Virtually everyone extends credit. Doing so, of course, can pose some challenges on the collections end. Here are some strategies for extending credit wisely and collecting payment successfully.
For some precasters, credit and collections don’t pose real problems, because payments are virtually guaranteed. This is the situation for Dutchland Inc. in Gap, Pa. Most of the company’s work involves government contracts, so most of its payments are at 90 days because of government policy. Most of the remaining non-government work is bonded work. “For work that is not government work or bonded, we work with general contractors that we have worked with in the past and have good relationships,” says Dawn Heffley, CPA, accounting manager. “If we end up not being paid in a timely fashion, we don’t work with them anymore.”
Roger Parshall, president of Parshall Concrete Products in Mound City, Mo., knows most of his customers and prospects. “If they’ve been in business for a long time, we’ll give them some credit, even if we haven’t done business with them before,” he says.
Leo Morrow, president of Leco Industries in Las Cruces, N.M., has a similar philosophy. “With new customers, we give them some credit but not a lot,” he says. “We don’t want to give them enough rope to hang themselves.”
For large companies, such as Jensen Precast in Sparks, Nev., credit extension needs to be more involved. “We always run through the basics, including getting a signed credit application,” says Roger Wright, corporate credit and collections manager. This includes two references. “Even though we know they probably won’t give bad references, we call them anyway.” The company also requests banking information, although Wright admits that this is getting more and more difficult to obtain these days, because the day of the personal banker is dwindling. “It is difficult to find someone at the bank who knows the account very well,” he says. The company also usually runs an Equifax small-business credit report on the customer. Since Jensen has the power of a mechanic’s lien, it may even extend credit to people whose credit may not be that good, because the company knows that if it goes through the mechanic’s lien process correctly, it should be able to get paid.
One of the best ways to improve credit and collection performance is to have the credit department work closely with the sales department and to think in a sales mentality. “Too many companies still think of credit as primarily a risk management function,” observes Abe WalkingBear Sanchez, president of A/R Management Group in Canon City, Colo. “They are missing the boat.” The primary role of credit, according to Sanchez, is sales support. As such, credit is primarily a communication job, not an accounting job. “In fact, the only reason a company should even have a credit department is to support sales,” he continues. Put another way, the only reason a company should incur the costs of carrying accounts receivable and potential bad debts and write-offs is to generate sales that would otherwise be lost.
David Balovich, CBF, CCE, chairman and CEO of 3JM Co. Inc. in Lake Dallas, Texas, agrees. “Unfortunately, there are a lot of credit people who don’t understand this,” he says. Credit managers may expect sales managers to communicate more with them, but it is the responsibility of the credit managers to initiate the communication, he believes.
Here are two recommendations for Sales and Credit to begin working more closely together. First, Credit needs to build and maintain the respect of everyone in Sales. Sales has to believe that Credit wants to do everything it can to help them. Second, there needs to be a mutual awareness of each other’s responsibilities. Credit needs to do everything it can to help Sales be as productive and profitable as possible. Conversely, Sales needs to realize that profitability doesn’t occur until the company receives payment from a customer so it can write a deposit slip for the bank.
Credit also needs to visit customers in the field with Sales so they can work together as a team to sell to customers. “You can’t do this sitting behind a desk in an office looking at a computer screen,” emphasizes Balovich. “You need to see the facilities firsthand, get to know the owners and get an overall feel for the business.” When you actually visit, you see the customer the same way the salesperson sees the customer, which can help you work more closely together.
“We are all pressed for time, but staying on top of collections is important,” says Wright. “We always try to make a pre-emptive call within 30 days.” Questions may include: Did you receive our invoices? Is everything OK? Do you have everything you need to put the invoices into accounts payable? “If we have a problem with a customer, we go up the ladder to the general contractor or the owner before we file a mechanic’s lien or lawsuit,” he says.
Leco Industries also works closely with customers. “We ask them if everything went OK,” says Morrow. “We make sure they are totally satisfied. Then we ask if they got our invoice and whether everything is ‘good to go.’”
Occasionally, Morrow will run into some customers who pick up product, but then don’t want to pay for it until they need more product. “We try to explain to them that we have to be paid sooner than that so we can make more product,” he notes. If these customers don’t understand this, the company will usually stop doing business with them.
In most cases when a customer is late, though, there is a good reason, according to Morrow. “We ask customers to be honest with us,” he explains. “That goes a long way with us. For example, if a customer says he will send a check next week, we expect him to send it.” If a customer normally pays on time but is having problems, Morrow will ask to be kept in the loop as to what is going on and when he will be paid.
Parshall Concrete will generally go out 90 days with contractors and not even add finance charges. However, if the customer does not pay within 90 days, the company will then add finance charges, and these charges revert back to Day One. “As such, I do everything I can to emphasize to them the importance of paying before 90 days,” says Parshall. In most cases, if it does get to 90 days and the company adds the finance charges, the company ends up never doing business with these customers again. The reason: The customers don’t like the policy and don’t want to work with Parshall anymore. That’s fine with him, though. “The end result is that we end up working with people we know and who pay on time,” he explains.
Don’t collect – sell!
While it is sometimes important to play hardball with collections, especially in the construction industry, it often makes more sense to start out “killing your customers with kindness.” For some customers, this works wonders.
That is, it is important to look at business processes (including collections) from the customers’ points of view. In the U.S. justice system, for example, you’re innocent until proven guilty. The same should be true in collections. Most of the time, customers want to pay you. If they have not, you need to assume they may have valid reasons. For example, maybe your company did or did not do something that is leading to the delinquency. Reasons may include the wrong product shipped, the shipment never arrived, the product is not working, service was not satisfactory, the invoice was incorrect or the invoice was never received.
Here are some specific tips for the initial collections call:
- Before you call, place yourself in a positive attitude. Visualize yourself and the customer having a positive interaction. See the customer as wanting to pay you. This will definitely come across when you call. When you call, assume that there is a valid explanation for nonpayment. Then mentally prepare yourself for each call with a contagiously positive attitude. Visualize a positive encounter every time you pick up the phone. This positive attitude automatically projects to the customers when you call, and they can immediately feel your concern and interest. It is a completely different mindset than calling with an attitude of resentment, anger and frustration. Again, make the experience as painless as possible. If defenses go up, rapport goes down.
- Your initial statement might be along the lines of: “We noticed that your invoice is days old. We want to make sure that you received the invoice, that you are happy with the products and service you received, and if there is anything else we can help you with.”
- Emphasize active listening skills. Once you pose your opening comment or question to the customer, listen. You have to be able to listen to and understand customers, and be able to convey to them that you are listening and do understand. Put yourself on the customer’s side of the issue.
- Develop strong communication and negotiation skills. Once you understand the situation and can offer a resolution, you need to get the customer on your side, be able to reach an agreement on payment terms, and then sell the customer on the benefits of complying with those terms. Empathize with customers and help them identify the best solutions. Identify the most feasible ways for them to pay you.
- Be persistent. Polite persistence is a necessity. During the first few calls, customers may vent a lot of anger and frustration. However, by the fourth of fifth call, some customers respond with, “Are you always this nice?” or “You’re not going to yell at me like everyone else does, are you?” Once you have achieved this type of rapport, you are in a position to begin understanding the customers’ situations and recommending solutions.
Of course, there will always be situations where, regardless of what you do, you will be unsuccessful at collecting. Options at this point include collection agencies, collection attorneys, and/or small-claims court.
“Some customers are just impossible to work with, so we eventually weed them out,” says Morrow. “In two instances, we have had to use an attorney to collect.”
Jensen may hand an account over to a collection agency, but it has to be a “clean” account, not one that involves any disputed payments. “We may also use attorneys to send out letters to customers, because they convey a sense of power that we sometimes don’t have when people ignore us,” notes Wright. “The attorneys make it clear that if we don’t get payment, we will file a lawsuit if we don’t have a mechanic’s lien in place.” The company may also use the small-claims court, but use it sparingly, says Wright, because it takes a lot of effort.
While a few collections may eventually need to go this far, there are other ways to prevent such problems. It’s all a matter of using the “Three Ps”: Be Professional. Be Polite. Be Persistent.
great help, thank u
I also think that it is very important to observe proper manners when collecting payment from the customers. I think that by doing this the customers will have a good impression and be willing to pay. Thanks for sharing this article.
Very informative and helpful article. Thanks William
Tina Moran says