By Bridget McCrea
Seven ways to start shoring up your accounts payable and paying your own bills on time.
Janis O’Dwyer knows a thing or two about how to keep a company’s accounts receivables on the right track. At Shutterstock.com she decreased the firm’s A/R by $1 million within a 30-day period and at her previous employer, Indeed.com, she decreased the organization’s aging accounts (of 60-plus days) from over 7% to less that 3 percent. Now, as accounts receivable services manager at YayPay, Inc., in San Francisco, O’Dwyer helps companies reduce days sales outstanding (the average number of days it takes to collect revenue after a sale has been made), automate collection processes, and manage A/R as efficiently as possible.
Having been around the receivables industry for a long time, O’Dwyer says the electrical distribution “cash crunch” isn’t that unusual, nor is it insurmountable. “I have a lot of customers that are stuck in similar situations,” she says, “squeezed between vendors that want to be paid every 15 or 30 days, and customers that ask for 90-day payment terms.”
The question is, how can distributors effectively manage this delicate balance while maintaining solid relationships with both their suppliers and their customers? Here are seven strategies to start using today:
- Set the terms upfront. Taking a relaxed or “languid” approach to payment terms sets the stage for trouble down the road, so make sure customers know what the terms are, what discounts they receive for paying early, and what will happen if bills aren’t paid on time (i.e., an 18% annual interest rate charged on the outstanding balance).
- Get ready to negotiate on both sides. Just because you lay out your terms, that doesn’t mean your customers have to accept them. “If your customer wants to pay in 90 days, and you have 30-day terms, then you’ll have to negotiate,” says O’Dwyer, who advises distributors to push that 90-day window down as far as possible (to 45 to 60 days, for example) early in the relationship. On the flip side, you can use the same tactic with your own suppliers. “If they offer you 30-day terms, push to get that moved back to somewhere between 45 and 90 days,” says O’Dwyer. “It may not always work, but if your vendors give a little it can provide some breathing room and help lessen the cash gap.”
- Send notifications out before the invoices are actually due. It may seem like overkill—after all, you already sent the invoice and your customer knows the deadline to pay it is looming—but sending out notifications in advance can help light a fire under the accounting department’s you-know-what and get it thinking about the upcoming payment. Otherwise, your invoice is liable to languish in the “to pay” pile until the very last minute. “If you set up 60-day payment terms, nine chances out of 10 your customer won’t even look at the invoice until those 60 days are up,” says O’Dwyer, who estimates that 85% of customers will begin paying on time as a result of this single step. “By sending out a notification you not only get your customer’s attention, but it also gives you a chance to iron out any potential issues (i.e., incorrect pricing, the wrong billing address, etc.) before the 60 days are up.”
- Learn to recognize problems before they become real issues. The more an open account ages, the least likely it is that you’ll ever receive your money. O’Dwyer advises distributors to keep a close eye on their A/R aging and the percentage of accounts that are pushing up into the 60- to 90-day (or beyond) territory on a regular basis. In other words, don’t wait until the end of the current quarter to go back and look at who owes you what. If, for example, you detect a pattern of untimely payments from week to week—and if that pattern doesn’t “level out” over the coming months—then you could be heading for a problem. “Even when business is brisk you should be doing full and regular analyses of your A/R,” says O’Dwyer, “and not just when things start to take a turn for the worse.”
- Use COD if the situation calls for it. One way to avoid cutting ties with non-paying customers is by using cash on delivery (COD) terms. And while you don’t want to be delivering new orders when a customer’s account is past due, you can very clear about how order payment will be handled going forward. “A customer that doesn’t pay you is your worst customer, no matter how you look at it,” says Elliott M. Portman of the Portman Law Group, P.C., in Hauppauge, N.Y. Specializing in creditors’ rights laws, he says that too many companies get into the compulsion to “dig the hole deeper” instead of using tools like COD to avoid future problems. Realize, however, that a company check used to pay for a COD order could potentially bounce, thus causing more pain for the distributor that needs to pay its own suppliers on time.
- Provide an array of payment options. Historically, companies would ship goods, send out invoices, and then wait for checks to arrive. In today’s fast-paced business world, everything from credit cards to mobile apps like Venmo to online payment platforms like PayPal are being used to speed up the payment process. By combining these faster pay methods with enticements (e.g., a 1% discount for paying within 30 days or less), distributors can beef up their cash reserves and be able to pay their own obligations on time. “If getting paid on time is your goal, then you have to give customers alternative ways to pay,” says Portman. “Then, make it worth their while by including incentives like discounts or other enticements.”
- Beware of the customer that uses up its credit and then jumps ship. All business owners have dealt with the customer that uses up its credit line and then moves along to the next unsuspecting vendor. Portman cautions distributors to be aware of these clients, who usually start to show their true colors when their outstanding balances begin rising just when they need, say, “$10,000 more in materials to get through the end of this stage of the project.” Just say “no,” says Portman. “This customer will drain your bottom line and then become a leach for another supply house,” he says. “You’ll have to chase them down for payment, of course, but you won’t lose as much as you would have had you continued to fulfill those orders.”
In the first installment of this article series we explored what to do when your distributorship is getting squeezed between a supplier that wants its money and a customer asking for extended payment terms.
McCrea is a Florida-based writer who covers business, industrial, and educational topics for a variety of magazines and journals. You can reach her at firstname.lastname@example.org or visit her website at www.expertghostwriter.net.
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