It is an age-old problem for anyone running a business – customers that never pay on time.
Managing your receivables is a critical activity and one that you need to get right if you are to grow and succeed. The first step is understanding why customers take advantage and do not remit payment on time. Once you understand the reasoning behind the behaviour, you can take steps to address it.
This post will call out the top five reasons why customers fall behind with their payments, and what you can do to improve that trend.
They are struggling financially – If your customer is struggling financially, or has a compromised cash flow situation, there is a likelihood that you won’t see that cheque on time. To prevent this from happening, or at a minimum, to anticipate if there is risk along these lines, you can monitor your customers’ financial health. Look at public court records (judgements, liens, bankruptcy filings, etc.) and cross reference your customers against them. If you sense there is risk, make sure you push to the front of the line and make your ask, because only the most outspoken and assertive suppliers are likely going to get paid under these circumstances.
They think they can get away with it – Perhaps last month, when that customer paid late, you let it slide. After all, they are a big organization, with hearty assets and they are easy to work with. The next month, you were a bit more irritated, but again, you let it slide. Unfortunately, this sends a clear message to your customer that it is ok to pay you late. And unless you reverse the trend, you should expect to continue being paid late. Set expectations and standardize your payment policies so there is no confusion or mixed message. Introduce penalties for late payments and communicate those protocols to all customers.
They have other, more important, suppliers – You may not be at the top of your customer’s list of priority suppliers. They might have more critical relationships with other vendors, and as such, feel a greater sense of urgency to pay them first. Nonetheless, this is no excuse for late payments, and you need to position yourself as an important part of their food chain, and deserving of the same timeliness of payment. Make your payment policies clear, and point out what your customer will lose if they do not pay you promptly.
They are disorganized – Late payments may simply be a matter of ignorance. Not all customers manage their books and records in a coordinated and organized manner. They might not realize that you haven’t been paid. This scenario is quite common, and one that can be easily remedied. This type of customer needs some hand holding. Send them regular reminders and invoices, well in advance of their payment due date. If you still do not receive payment on time, follow up by phone, letting them know they are delinquent. Usually, once it is on the radar of the right person, you will get your cheque.
Your invoice terms are too long – Are your invoices due on receipt? Or do you have payment terms of 30 days or longer? Business will naturally prioritize the invoices that are due sooner. And those invoices that are de-prioritized are therefore more likely to get overlooked. If you cannot issue invoices due on receipt, consider offering incentives for customers who pay earlier than the term indicated.
Late paying customers can derail your business, especially if it becomes an epidemic problem. Make sure you get ahead of it and put practices in place to incentivize customers to pay on time, and penalize those who do not. For more information on how to manage your receivables, contact Miller Bernstein today.