Collections are a pain in the neck. That’s not why you’re in business. You want to make sales calls, not collections calls. So we try to mitigate collections by using different policies: credit, COD, deposits (or retainers), terms, early payment discounts. These are all ways to treat the symptom but not the cause.
It has been a long-standing belief of mine that customers don’t pay for one of two reasons: they don’t have the money (or don’t want to part with it if they do), or you’ve made them not want to pay.
The first reason is a problem, but not a very big one. In over 12 years of dealing with escalated collections matters I’ve run into this maybe 50 times – which may sound like lots, but with over 25,000 retail transactions undertaken that’s less than one quarter of one percent. It’s annoying, it wastes your time, it’s frustrating, but it is not going to break your business.
The second is a much more serious problem. Not the least of which is that it negatively affects your cashflow – the life blood of any business. It’s also going to take up time – your time. There isn’t enough time as it is, but now you’ve got to make phone calls, leave messages, make follow-up calls, send statements – all those things you’re supposed to do when someone owes you money. This is your money – you’ve earned it, why won’t they give it to you? It may go further – collections agencies (say goodbye to 30-50% of your money – if you get it at all), small claims (you think making phone calls took up a lot of time?), liens (when they refinance their property you’ll get your money – in five years!) or just writing it off as a “bad debt”.
The only thing more frustrating than this is realizing that it’s probably your fault.
In my experience, the majority of customers who don’t pay are unhappy with the product or service that they have received. If they had been happy, they would have paid. Promptly.
People appreciate value – and value is a perception. Perceived value is a combination of a quality product and great customer service for a reasonable price. If a customer is late paying you it’s probably because the product didn’t meet expectations, the customer didn’t feel like they were important to the business, or they felt the price was disproportionate to what they received.
About ten years ago the company I was working for at the time bought another multi-location business. The deal included the physical assets of the company, the client lists and agreements and their receivables. They had been having a terrible time collecting and had substantial balances over 90 and 120 days. We set about contacting the customers who owed and time and time again we heard, “But the job isn’t done yet!” In over 95% of the incidents it was a piece of trim or other aesthetic issue. We would promptly send out a technician, fix the deficiency and immediately collect the money. The customer was just waiting until they were happy with the work that had been done!
So measuring your receivables turnover is more than just a predictor of cash. It’s also a measure of customer statisfaction.
It’s also a stark reminder that everything in business is driven by the customer.