Past Due

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Tips For Collecting On Invoices In Tough Economic Times

Whether it’s the best of times or the worst of times, in business cash flow dictates whether a company will sink or swim. “It can be a good product and a great company that’s been in business for 50 years, but if you don’t focus on cash flow, you can be out of business,” said Norman Fornella, CFO at Verrex Corporation in Mountainside, NJ. “It doesn’t matter how good you are, because without working capital—hard cash—your vendors will shut you down.” An effective accounts receivable collection process, therefore, is crucial to survival, especially when practically every organization out there is facing some difficult financial challenges.

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The primary goal for businesses, obviously, revolves around making sales. While this is paramount, noted Bob Bernstein, Esq. at Bernstein Law Firm in Pittsburgh, PA and author of Get P.A.I.D., A Guide to Getting Paid Faster: And What To Do If You Don’t, a sale should be regarded as a loss until you are paid. The key to making this happen is to have a clearly laid out plan that details who companies will extend credit to, under what circumstances credit will be granted, and what happens after the sale, including how invoices are processed, the follow-up that takes place, and finally, what happens if a client doesn’t pay.

“If your plan says that you call the customer five days after the installation is complete to make sure that everything is fine, and that they have received the invoice and that it’s being processed, then somebody should be accountable for calling five days after the installation is complete,” Bernstein advised. If the terms are net 30 days, a call should be placed on day 31 if the payment hasn’t been received. “There should be an escalation of urgency when an account gets to be past due.”

Joie Hunter, CFO at South Western Communications (SWC) in Newburgh, IN, noted that the company’s previous policy was to conduct follow-up 45 days after the invoice date; today the accounts receivable department checks on unpaid invoices after 30 days. “We do this to make sure that things are in process after we initially send everything out just because things have slowed down a little bit,” he said. “It’s in relation with our accounts payable, because they are now calling a lot earlier than they used to also.”

Fornella said that one challenge his company faces is getting paid in a timely manner when the organization works with a general contractor. “If we are working directly for a client, we can generally, in our contract, get paid within 30 to 35 days,” he explained. “However, if you are working for a general contractor, even though our terms include payment within 30 days, general contractors like to invoke a pay-when-paid clause, which is when they get paid, then they pay you. If they don’t get paid for 60 days, it’s very difficult to get the money out of them before they get paid.”

Some companies may choose to extend credit to clients. This has resulted, for some, in doing background credit checks. “We are doing more credit checks—especially on new accounts, as well as on established customers,” Hunter said. “With this economy, you never know. If GM can go bankrupt, so can everybody else.”

Where it becomes tricky is when a longtime client suddenly stops paying their bills. While it’s necessary to get paid, you don’t want to destroy a relationship that has the potential to outlast any immediate financial concerns. “If you have a big customer that makes up a big percentage of your business and you expect them to continue, you have to understand that they are having problems,” Bernstein said. “You have to be willing to talk to them about it and work something out that makes sense for both parties.” You may, for example, break the outstanding balance down into incremental payments. “It gets you some cash flow, it reduces your risk somewhat and it gives them something that they need, which is some time.”

Companies that operate based on their cash flow stand a better chance of easing their way through this economic climate, and this requires a serious commitment to the continued management of receivables. “It’s a tough time in all industries,” Fornella said. “CFOs and executive managers are spending more and more time focusing on cash flow so that they can stay around for the long term.”

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