Our business, like virtually any business I know that has been able to survived through two decades, has a reasonably systematic accounts receivable management and collection system. In advertising sales, when we are working within the inventory of a given publication, there is generally little incremental cost in accepting another advertisement. Fixed and variable costs are established by other variables, the “one extra ad” is usually published at virtually no direct additional cost to the publisher.
This fact means that we structurally need to be less concerned up front about credit quality than other businesses, which can incur significant and unrecoverable up-front costs in serving individual clients. If I were a contractor or renovator, I would certainly have different policies regarding potential new client evaluation and accounts security, especially in managing the collection of the last bit of cash, often governed by hold-back legislation.
Nevertheless, if we don’t carefully manage our accounts receivable, we will be in trouble, soon enough. So we have set up our own systems, some unique and others more conventional, to manage things. For example, we have a huge (25 per cent) discount for immediate or prompt payment. Of course we price our services to be profitable at this discount level and respect our clients — if for some reason, they didn’t understand the discount deadline, or need some additional time to pay, then our front-line administrative employees are given the authority to extend it without question. Some clients pay the higher premium for being late; and this revenue offsets the very few who fail to pay at all — meaning we don’t have to count much “bad debt” in our business equations.
We also have collection follow up systems and a dedicated part-time employee who comes in on a regular schedule to manage the accounts receivable and collect the outstanding accounts. A commission-only collection agency is in the wings for those clients we need to write off; we recover some of the bad debt that way. When accounts go above 90 days, we “remove” them from our income statements to prevent our accounts from looking better than they are.
Finally, and most importantly, while collections processes are systematized and delegated and routine, I still am truly involved when things go overdue, making the final go-no-go decisions regarding further collections actions or writing off accounts.
These points came clear yesterday afternoon when a significant account flagged overdue at 111 days. For reasons beyond this blog, this account and a few others for some special products/services are not administered within our “net/gross” prompt payment system. Nevertheless, the lateness of the account surprised me, because this customer has always been extremely prompt in paying his bills.
However, at the beginning of our relationship, his business peers warned us that he had a shaky past — with a bankruptcy where unsecured creditors were left in the wind. Fearful we might be experiencing some deja-vu, I wrote the email to the client explaining that my staff had been having some trouble reaching and resolving the outstanding balance.
Within 15 minutes, he responded to say that he didn’t know the account was overdue, he was cutting a cheque immediately and would drive it over to us — but could we clarify our invoicing system, because he didn’t know there was a problem. He went, in essence, beyond any norms in rushing to resolve the matter.
I treated this response with respect, pulling out our account records and seeing exactly where, and how, the underpayment occurred, drafting the reconciliation note. I also offered to pick up the cheque — way across town, during rush hour. As a business, we didn’t need the money — our current cash flow is in great shape — but I felt that if he wanted to pay this bill right away, I should oblige, but not put him to more personal inconvenience. Late Friday, we collected the money, bringing things back into balance.
I’m sharing this collection story because it shows the importance of systems and values in business. Our client, remembering his “past”reputation, wants everyone to know that he does things differently — that he will always keep his business in order and pay his bills ahead of schedule. So when a slip up occurs, he works to make things right at a level beyond the norm. This is obviously good for his current and future reputation.
Equally, with systems and account management processes in place, we can see where we are in business on a daily basis. It is good to be profitable, to have cash in the bank, to know our own accounts and payroll/tax obligations can be settled in a timely manner, and we don’t have to worry too much about bad debt, even though our business can and should accept sometimes shaky accounts. (If there are limited incremental costs in providing the service, a 50 per cent write off rate may be high, but it is still better than a 100 per cent write off if we decline the account in the first place. Don’t try that approach, however, if you need to spend real cash in providing services to individual clients.)