Holding Customers Accountable

When a customer pays its invoices late, company executives spend little time debating who’s to blame: it’s the customer’s fault, right? Possibly, but things are rarely so simple. Most problems have hidden solutions that are revealed only when assumptions are pushed aside to offer a new perspective. Consider some of today’s most innovative medical technology and you’ll probably find that researchers questioned the obvious, allowing them to uncover a novel solution others overlooked. Fortunately, finding new ways to deal with late payments won’t take a major scientific breakthrough, but it will require a similar fresh outlook. Many device companies and other small business owners fall into the trap of thinking that ensuring on-time payments is only the customer’s responsibility, but a more productive perspective is to look at what a device company can do on its end to accelerate payment.

The reality is that despite its desire to collect debts as soon as possible and boost cash flow, a company’s own invoicing practices and the way it deals with customers may be part of the problem. Ironic? Yes, and perhaps a little humbling. But if your own practices are standing in your way, the good news is that you can probably improve your company’s cash flow more easily than you ever thought possible. Running credit checks, having written payment agreements, and offering a choice of payment options are just a few simple practices that keep the Accounts Receivable department happily busy. The following suggestions can change how you deal with customers and help you to streamline invoicing to ensure fast payments.

Research Payment History

The best way to avoid chronic slow-payers is to make sure the company begins each business relationship, project, or order in a way that will protect it and make terms and expectations clear to the customer. That begins with knowing whom you’re dealing with from the outset. When establishing a relationship with a new customer, research the client’s payment history through professional references so that you’re aware of any past payment issues. Another key step is to conduct a credit check with a credit-reporting agency, such as Dun & Bradstreet or Experian, before accepting a large order. Obviously, there’s no fail-proof way to know who will pay on time. But if you’re aware that there’s an established history of late payments, you can decide whether to do business with a potential customer or determine what special terms you might require of the customer in order to limit the risk of late or nonpayment.

Assessing the risk of late payment before accepting a new customer is an essential step, but a device company can also limit its risks by keeping tabs on existing customers. Take a look at client track records with your own company over the past six months. If a customer’s payment time has continued to grow, take that as a warning. For your most important customers, it particularly pays to stay abreast of related industry news so you can see problems coming. Events such as losing a large account, increased market turbulence, lower stock prices, or rising costs can directly affect a customer. If monitoring this kind of information seems too overwhelming, keep in mind that it doesn’t require scouring specialized journals. A simple alert from a leading news site using relevant keywords and your customer’s name can go a long way towards keeping you informed.

When you’re ready to undertake new work with a client, start by spelling things out with a written agreement. Whether it’s a formal contract or a simple statement of work, you can head off any misunderstandings surrounding deliverables or payment with a clear description of goods or services and payment terms. This will help avoid delayed payments caused by a customer that questions charges or the scope of work at a later date. Clearly stated terms and obligations will also put you in a better position legally if collection becomes an issue.

In addition don’t hesitate to restate your terms of payment on invoices, even if you’ve already stipulated them in writing from the outset. Forego the hollow words “due upon receipt” and send invoices with a due date to get customers’ attention and keep them on schedule. While customers who pay in 30 or 45 days may simply follow their own schedule, a due date at least puts your terms in writing.

Facilitate On-Time Payments

One way to keep customers paying on time is to give them a choice of payment options. There’s nothing inherently wrong with an old-fashioned paper check, but when a customer’s cash is tight, requiring a check can mean waiting longer for payment. Consider other options such as credit and charge cards that will provide cash quickly, regardless of your customer’s cash-flow situation. Cards provide you with an easy way to reduce the risk of slow or nonpayment, and they give convenient options to customers facing a cash flow crunch. Beyond cash-strapped customers, many businesses also appreciate the opportunity to take advantage of credit and charge card rewards programs when paying invoices. Another payment option you might consider is an electronic funds transfer. Accepting automated clearinghouse (ACH) payments is convenient for many customers, and it also saves time, given that funds are deposited directly in your company’s account as soon as they are available. That not only cuts the time required to receive funds, but it also cuts out the time and effort required to deposit a paper check.

To help promote faster payments, some businesses offer customers a small discount for early payment. You might, for example, reward customers with a 1% or 2% discount if they pay within 10 days, which can significantly shorten your payment cycle. Be aware, however, that a discount is a benefit you may want to offer selectively, because some customers may simply take the discount and still pay late. Just as you may choose to reward early payment, you can also want to establish a disincentive for paying late, by setting a late fee or interest penalty on invoices that are not paid on time. Post the terms on your Web site—on every invoice—and also be sure to include the terms in any contractual agreement.

Give your customers the information they need to make decisions and stay on top of their work with you. Provide updates on any issues or relevant changes in service or product as work progresses. You should also consider putting changes in writing if you expect that they could lead to additional charges or if they vary significantly from your original agreement. Providing customers with this type of information up front can help avoid problems or delays when it comes time to pay. Likewise, once a project is complete or an order is fulfilled, you should collect some information of your own by following up with clients. If there are any unresolved issues, you can deal with them promptly and avoid slowing payment. In any case, following up is simply good customer service that won’t go unnoticed.

Improve Basic Invoicing Practices

Customers can’t pay invoices they haven’t received, so make sure to send invoices as soon as work is completed or goods are shipped. Otherwise, a delay of only a day or two can mean missing the customer’s payment cycle, leaving you waiting until the next one. Most small businesses—and particularly those relying on manual invoicing systems—can speed up invoicing and payment cycles simply by taking a closer look at invoicing basics to eliminate wasted time. Because manual systems leave more room for error, it’s important to make sure every step of the process is running smoothly. A device company may, for example, be sending invoices quickly, but are they really reaching their intended destination? Verify that all customer information is up to date, and determine that you’re sending invoices to the person who can actually pay them. If customers have to pass along invoices to the appropriate employee, that could add valuable days to the payment cycle.

Another common invoicing issue is missing information. Of course, information that’s crucial to one client is simply a distraction to another. Get to know customers’ preferences and avoid delays due to accounting technicalities simply by asking new customers what they require on invoices. Do they need a purchase order number, or will your invoice number suffice? Is a detailed breakdown necessary, or will a general description of services or goods do? Perhaps they require your Employer Identification Number (EIN) on the invoice. Asking the right questions up front is free, and failing to do so can really cost you in the long run.

Because speed is so critical, many companies find real advantages in online invoicing and payment solutions. Online invoicing automates manual processes and can eliminate mistakes such as incorrect invoice numbers or addition errors. Furthermore, it speeds up payment with e-mail invoices that offer a click-to-pay button and a choice of electronic payment options, such as credit and debit cards, ACH, and eChecks. Online solutions will also deposit payments directly into your account, bypassing the need to deposit checks or wait for funds to clear. If you’re interested in an online payment method, keep your specific needs in mind, because not all solutions are equal. Look for those, for example, that offer multiple online payment options, and don’t forget to ask about compatibility with any invoicing software you currently use. You may also want to look for a Web-based system that will be easy to use from the office or from the road.

Whatever invoicing system a device company uses, it must be overseen by someone who is actively and consistently minding the books to give the necessary focus to its accounting practices. Designate or hire a reliable bookkeeper, accountant, or even CFO who works on a contract basis to handle accounts receivable functions. This employee’s job will be to approve credit, if applicable, make collection calls, receive payments, and make deposits. By taking this active step towards strong accounts receivables, you’ll take a major step towards stronger cash flow.

Ready for Meaningful Changes

With a designated bookkeeper in place, it will be easier to tend to the kinds of details that can speed payment, such as establishing a proper document trail and timely collection calls. For future reference, the bookkeeper should document all communications with customers regarding invoices and record all requested changes in writing. If it’s necessary to follow up on late payments, these records will provide documentation. The bookkeeper should also be sure to have an organized system for tracking overdue invoices so that Accounts Receivable can follow up immediately on outstanding debts. When dealing with overdue payments, it’s wise to take a matter-of-fact approach and assume good intentions on the part of your customers, because it’s always possible that there may simply be a misunderstanding. In any case, all collection calls should end with an agreement on a payment date and a specific amount.

Once a device company is able to see beyond the illusion that the customer is in the position of power when it comes to payments, the company can make meaningful changes. Armed with solid strategies for accelerating payment, it’s now up to executive management to put this knowledge into practice with a consistent routine. Whether you or someone else on your staff deals with invoicing, make sure that you stick to a plan. Because knowledge and good intentions won’t help to prompt quicker payments—but a diligent routine of smart invoicing practices will.

Mary Ann Reilly is senior vice president at American Express OPEN, a leading issuer of card products for small business owners. She may be reached at [email protected].