Global-information services company Experian recently released a study showing that companies with one to nine employees took the longest to pay their bills in March 2012, an average of more than eight days overdue. This is more than 10 percent longer than a year earlier. Right on their heels are firms with more than 1,000 employees taking almost eight days, an increase from fewer than six days in March 2011. All business sizes were slower in paying their bills in the first quarter.
Understand that an average overdue payment of eight days means some customers are paying on time while others are paying 60 or 90 or even more days late. What are you going to do about it?
You may be able to negotiate a line of credit with your bank to cover the period of slow pay. The cost, ranging from 6 percent to more than 20 percent from alternative lenders, will eat into your profit margin. In some cases, the cost of money will exceed the profit from the sale.
One line of defense is to levy a finance charge if your invoice is not paid on time. If the rate is substantial enough to cover your costs and if you are diligent about charging and collecting it, this approach may move you further up the line to be paid. In addition, it may protect your profit margin.
Another popular defense tactic is to offer a discount for early payment. This may bring in money from financially sound customers; but probably will not accomplish much with financially stressed firms.
Look at your billing cycle. If you are following the traditional practice of billing at the end of the month, it’s time to speed things up. At a minimum, begin billing twice a month. Even better, send the invoice the day you ship the order or provide the service.
Business owners are frequently reluctant to be aggressive in billing because they don’t want to irritate their customers. This is particularly true if the customer represents a large percentage of your business.
At some point, this concern must be put aside and business reality must be recognized. An order on which you lose money because of slow pay is worse than no order at all.
Slow-paying accounts are at high risk of never paying. Historically, fewer than half of accounts more than 90 days overdue are ever paid. Do you regularly “age” your accounts receivable? By that I mean, do you determine how many days each account is overdue?
Most accounting packages will prepare an aging report. I suggest you run a report each week and promptly follow up with late payers. It’s also a good idea to track the trend of each customer to see if some are paying later each month. Such a trend is a loud and clear warning.
A hidden cost of slow-paying customers occurs when a firm must delay expansion because it lacks the working capital to grow. Money tied up in receivables cannot be used to hire employees or add to product or service lines.
Work promptly and persistently to collect your overdue bills. It’s your money at risk.
Bowser@BusinessValueInsights.com. Dan Bowser is president of Value Insights Inc. of Durango, Chandler, Ariz., and Summerville, Pa.