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Money Matters: Making Collections Less Painful
| Bill Swanekamp
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>> Published Date: 10/26/2012
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The following was taken from the latest edition of the Ball RedBook, which focuses on accounts receivable. You can purchase both volumes of the 18th edition of the Ball RedBook by visiting www.ipgbook.com as hardcover books or as an e-book for your e-reader.
When it comes to managing your business successfully, one key area is collecting money.
Surprised? You shouldn’t be. Look at all the commercials on TV offering to assist you with paying off your debts. Wonder why? Because in America, not paying your bills is very common. This includes the greenhouse industry. So the question you need to ask yourself is: “How am I going to collect my money?”
At first, it might be best to make all your sales on a cash basis. That way you don’t have to worry about collecting. Eventually though, your business will grow and it’ll be necessary to offer credit terms. Ideally, you’ll be running your business through a computer system that records A/R information with each transaction. Then, once an invoice is paid, you can easily record the transaction and update the customer’s account. Additionally, at the end of each month, you’ll be able to generate a statement for each customer that indicates if any late charges are due.
Prior to all of this, you must first determine which customers are going to receive credit. This is not an easy process, and it needs to be well documented. In order for a customer to establish credit, there are a number of steps that must be completed. First, the customer must sign a credit application, which gives you permission to contact the vendors he’s listed as references. It’s imperative that one of the owners signs the application, not a bookkeeper. The application should clearly outline your terms, such as net 30 days, and what interest rate you’ll charge per month if the invoice isn’t paid on time. If you don’t specify this information on your credit application, you won’t receive any late charge payments if you ever have to turn the account over to collection.
Next, you need to contact the vendors listed on the application and ask them to provide you with a credit history. Usually three vendors must respond in order for a new customer to receive credit. Some key points to ask these vendors are if there’s any history of bad checks or long delays in payment. If there are, then it might be best to postpone granting credit. If all of the vendors reply that the customer is a COD (cash on delivery) customer that has not established credit, then you must make a decision whether or not to grant credit based on your past history with this customer. It might be possible to grant him limited credit so that your exposure is minimal.
At Kube-Pak, we’ve come up with another method of reducing our exposure, called PPI, or Pay Previous Invoice. It means we deliver the first shipment on credit, but when the second delivery is made the customer must pay for the first delivery, and so forth. That way you give the customer an opportunity to sell some of the first delivery before he must pay for it. This keeps new customers on a tight leash, but allows you to find out if they’re good-paying customers.
What do you do if a customer doesn’t pay his bill on time? Unfortunately, it’s very common in the horticultural business for this to happen. Since we’re an industry of small companies, often your customer uses you as his bank. If this happens, you must first decide if you can handle this arrangement. Without sufficient cash coming in, you may need to borrow from your bank to meet your financial obligations and pay interest on this loan because of unpaid receivables. If this occurs, then the question that arises is: Will you charge interest on late payments? To help you answer this question, I’ll ask you another one: Do you know of any banks that lend money interest-free? Hardly! So there’s your answer: If banks charge interest on borrowed money, so should you.
Now, here comes the difficult part. Will you stick to your guns and insist that your customers pay those late charges? Our experience has shown us that you must insist that all late charges be paid in order for a customer to maintain his credit standing. If they don’t appreciate it costs you money to carry them past their credit terms, then you don’t want them as a customer, plain and simple. If you adopt this policy, there is one caveat: Be prepared to lose some customers. Somehow, our industry has been led to believe that late charges are evil and it’s not necessary to pay them. Don’t contribute to this misconception. Establish your credit policy and stick to it. In the long run, you’ll weed out poor-paying customers and maintain a positive cash flow for your business. GT
Bill Swanekamp is president of Kube-Pak Corp., Allentown, New Jersey.
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