by Richard Harshaw
A sale is not made until the money is in the bank.
In almost every form of trade and livelihood in America, customers can purchase on credit only if specific (and often stringent) conditions have been met — except in our trade. We are one of the worst about walking into a sale with blind trust in the customer’s intentions.
Most of the time our instincts prove correct and there is no problem. But sometimes problems arise, problems that can end up costing us thousands of dollars. Prevention is always less costly than cure, so it stands to reason that if we could only develop and then follow a clear and specific credit policy to guide us in our selling, we could avoid those few but costly mistakes.
Credit Policies
A clear and well-written credit and collection policy shared with the customer up front can avoid much pain and anguish later for both parties! Terms of sale should be clearly stated in the policy and on the proposal document. There is no one best way to do this, but some possibilities are:
Cash due upon completion
50% down upon acceptance and the balance due upon completion
$500 down and the balance due upon completion
10% down and the balance financed through a retail credit program (credit card, manufacturer program, etc.)
It is extremely important to spell out up front and in complete detail the terms of sale for residential new construction and add-on/replacement. For commercial plan and spec contracts, your terms cannot supersede those in the specifications and contract documents. In such cases, you must either agree to live with the specifications, negotiate a change in the terms, or not take the job.
Checking Credit Ratings
Checking a customer’s credit rating is a rarely done but simple procedure. It usually requires that you belong to a credit bureau or similar service.
Think of it this way: when you eat out with your family and use a credit card to pay for the meal, the restaurant actually runs a credit check on you for the price of the meal! (That’s what swiping a credit card in the read does!) So why don’t we check credit before letting a customer walk away with a new $10,000 system?
Collection Procedures
Collecting on delinquent accounts is a delicate business. You need to know your rights and exercise them. If you write off $2,000 in bad debt, how much do you have to sell to make up for it? If your profit margin is 5%, about $40,000!
You should bill out jobs every day! The practice of waiting until the end of the month wastes your money and is inexcusable in this day of computerized accounting systems. (Of course, in commercial plan and spec jobs where the specs detail just how billing is to be done, you are at the spec’s mercy.)
Determining when an account becomes delinquent should be part of the credit policy. For instance, some delinquency clauses say, “Due by the 21st of the month; delinquent after the 30th.” Perhaps the best way is to say, “Due upon receipt. Past due 30 days from the date of the invoice.”
So what happens when a customer goes beyond the grace period?
Let’s assume you’ve clearly communicated your credit policy, and specified when an account becomes delinquent. How do you handle those delinquent accounts?
Books have been written describing elaborate collection procedures using letters and cards, but the simplest, fastest and most economical way is to call the customer on the phone. Mention the reason for the call and ask when you can expect payment.
It may help to offer the customer a payment plan. If the customer agrees, make note of the plan, send a confirming letter, and follow up on it. If the customer suggests a payment, thank them and send a confirming letter.
Be firm. Ask for specific answers to your questions, and wait for the customer to give them. Don’t say, “I need the money to pay my suppliers.” You need the money because it is yours and because the customer made a promise to pay by a certain date, a promise he has not kept. The customer is enjoying the benefits of the job; you should too.
Remind the customer of the original terms of sale, terms agreed to when the customer signed the contract. If the customer defaults on the plan, take stronger action. On large past-due accounts, the company’s owner should make the call.
Don’t hesitate to use a professional collector when you have exhausted all your efforts. Even splitting the amount with collector 50/50 is better than a 100% write-off!
Go to court as a last resort. If you threaten legal action, take it. Most states have small claims courts to settle disputes under a certain amount. Make sure you know your state’s laws and procedures for small claims.
Know Your Rights!
For larger amounts, you will have to use the formal legal process. This first means protecting your lien rights. Each state has different lien laws, specifying even the text that must be written on the proposal and invoices and the number of days in which you are allowed to file a lien.
Once your lien window closes, you are out of luck! The moral? Stay on top of your delinquent accounts and don’t let the lien window close!
Normally, just filing a lien will result in payment. But if the customer still does not pay, have an attorney draft a registered letter explaining your intention to sue. Be sure to allow the customer a fair but firm response time.
Credit For Service Calls
And what about credit for service calls? Go cash-on-delivery (COD)! The customer should be told when the service appointment is made that the service technician will collect for the call while there and that cash, personal checks, or major credit cards are acceptable forms of payment.
If you have long-term service customers who have always been billed for service in the past and their payment record is flawless, there is not much to gain by changing the policy for them. You will only arouse suspicions and may lose them as customers. However, every new customer should be started as a COD account.
Cash for service is important because the amounts are usually not worth the cost to pursue legally. Also, once the customer’s system is repaired and running properly, the need is met and the psychological motivation to pay is less.
One Person in Charge
In all cases of collection procedure, the same person should be in charge each month. This is to be sure that customers who promise to make payments per an agreed-upon plan don’t slip behind and tell someone else next month that they’ll agree to a different payment plan (again!). It also helps present a unified front to the customer.
But to safeguard the happiness of the collection manager, delinquent accounts should be called throughout the month and not just all in one day. For example, with computerized accounting, it should be an easy practice to print the aged receivables list each Monday morning, select one fourth of the delinquent accounts (since this report would be run four times a month), and call a few of those people every day. Since customers can sometimes become abusive during collection calls, this keeps the abuse from piling up all on one day. Most of us can take a few abusive customers each day, but not 30 or 40!
I suggest that any amount over 60 days old automatically be the responsibility of the owner, and that the collection manager brief the owner on the account’s history (including payment plans and other promises made and broken) before the owner calls the customer.
The Goal
Finally, strive to keep the average age of your accounts receivable to under 30 days. This may not always be possible, but it is a strong goal to aim for. You can calculate the average age of your accounts receivable by dividing the accounts receivable on your balance sheet by the sales volume for a full year and multiplying the result by 365.
For example, if you have accounts receivable totaling $80,000 with $1,200,000 in sales, the average age of your accounts receivable would be 80,000 ¸ 1,200,000, or 0.06666, times 365, or 24.3 days.
Anything over 45 days is cause for taking strong and quick action.
Don’t Wait Too Long!
The Commercial Law League of America released startling data about the odds of collecting past-due accounts:
Current account 98% odds of collecting all of it
1 month overdue 93% odds
2 months overdue 85% odds
3 months overdue 73% odds
6 months overdue 57% odds
9 months overdue 42% odds
1 year overdue 25% odds
2 years overdue 13% odds
Other research reveals that:
- If a customer goes beyond 60 days past due, there is a 62% chance it will happen again.
- If a customer goes beyond 60 days a second time, the odds are 95% that he’ll always pay beyond 60 days.
- Two-thirds of the accounts that get to 60 days past due will reach 90 days past due.
If you want a mild shock, take the amounts you have in the aging brackets mentioned above and multiply them by the odds of collection and then total up the amounts to see how much your accounts receivable is probably really worth.
Once you begin to look at your receivables with this in mind, chances are you’ll be even more motivated to stay on top of the situation. As is always the case: Time is money!
