Chapter 5

Spotting and Reacting to Changes in Customer Habits

In This Chapter

Setting controls to maintain cash flow

Avoiding payment slowdowns

Dealing with customers’ excuses for slow payment

Handling changes in customers’ payment behavior

Tracking down elusive customers

Arguably, the most important skill of a credit and collections professional is the instinct to recognize and react to changes in customer habits that signal trouble. To avoid trouble, you must listen to your instincts and follow up on your hunches. In this chapter, we give you some pointers for handling potentially troublesome situations.

When goods and services flow smoothly and payments are made promptly, you and your customers are more comfortable with your relationship. For the most part, your customers won’t object to your close monitoring and your eager follow-up for payment of invoices. Indeed, down the road, customers that take offense at your close monitoring are usually the ones that give you the most trouble with payments and collection.

General Controls for Keeping Your Cash Flow Steady

Keeping a steady cash flow is difficult in good economic times and a real challenge when recessionary pressures set in. A domino effect occurs when your customers fail to pay your company on time — resulting in your company’s inability to pay its creditors on time. To keep your cash flow positive and sufficient to cover your company’s bills, you must implement some general controls as part of your credit policy. Some advice:

Be aware of slowing payments. We can’t emphasize this red flag enough. Watch for any signs of deterioration in paying habits. Although one late payment may not break the bank, it’s significant because it shows a disregard for your company’s payment terms — such that even one late payment does justify a polite nudge to the customer. The nudge may take the form of a “thanks for the payment” compliment combined with a gentle reminder of the terms — “please keep in mind the terms are [whatever the terms are, such as net 30].”

Be ready to respond to customer bad habits. Communicate with your customers. Let them know slowdowns in paying habits aren’t acceptable, and prompt them to make payments. After a second late payment, for example, inform the customer that you may have to take steps to correct late payment habits, such as the temporary suspension of credit terms.

Be considerate, yet firm. No need to panic and ruin a relationship . . . yet. Your communication at this stage is still very polite, yet firm enough to convey dissatisfaction — such as notifying your customer that a privilege, such as favorable credit terms or 24/7 availability of goods or services, may have to be suspended until confidence in prompt paying habits is restored.

Be prepared to reduce a line of credit, require COD (cash on delivery), or cut off deliveries or services. If a customer is paying invoices more and more slowly, don’t get yourself in any deeper. You don’t want or need the added credit exposure.

Let your customer know that you’re following established credit policies (which we discuss in detail in Chapter 2) that require specific responses to deterioration in paying habits, including reduction and possible elimination of credit terms. The old standby: “It’s nothing personal — it’s just business” approach can help you avoid sending bad vibrations to a customer you’re simply trying to nudge back on track.

Be honest in your communications. Although some consider bluffing to be an acceptable tool in business, it’s not always effective the first time, let alone a second. If you threaten to take action if you don’t get what you’ve asked for, be prepared to do it.

If you notice a decline, step up the pressure for payment, as we discuss in Part II. Notify the appropriate people within your own company that they may experience a slowdown in cash flow. If the account is substantial, they may want or need to adjust the company’s expenditures in advance of encountering financial problems. Adjustments may include delaying discretionary purchases or employing free interns from local schools rather than hiring more hourly help.

Tailoring Your Strategy: A Short Leash for New Customers

You’ve made a decision to sell on credit terms. Now you have to carefully watch your customers, especially the new ones, to see whether your confidence in giving them credit was warranted. The following sections help you know how closely to watch new customers and when you may want to relax your terms of payment.

Setting tighter controls for newer customers

When you first extend credit, your new customer knows he’s being monitored. For that reason, in most cases he’ll pay the first few invoices on time. After that point, some customers decide that they can relax and pay less promptly because they’ve already earned your respect and are no longer under the microscope, and their payments start slowing. To protect yourself, you may choose to adopt some of the following controls:

Put the customer on a short leash, such as a 15-day watch list, so you detect a slowdown in payments almost immediately.

Be ready to turn off the credit faucet: No credit if no payment.

Hold up further deliveries of your goods or services until the customer pays his late invoices.

Get additional assurance of payment, such as liens, guaranties, and promissory notes.

Forms 5-1 and 3-4 on the CD can help you get those assurances in writing, including sample promissory notes and personal guaranties.

Helping out timely payers

Giving your good-paying customers favorable treatment is a sure sign of respect and gratitude, and most customers appreciate the favor. More to the point, customer service is highly valued — your customers want to be treated well. Possible favors include

Extending their payment terms (for example, payments due in 45 days instead of 30)

Forgiving some service charges on the account

Offering a discount for early payment

For example, if a good-paying customer encounters a temporary financial slowdown, or is facing unexpected challenges due to changes in the economy, the level of competition, or industry trends directly affecting her ability to pay on time, she’ll appreciate your extension of time for payment. Your reward may be an increase in orders, good service, or priority treatment when things get busy, or positive word-of-mouth to potential customers. Authorize your credit manager to provide a perk or two to a good customer.

Even your good customers must be monitored. When your client reports a temporary financial setback, keep an eye open in case things become more serious. Be flexible, but don’t let your customers take advantage of you.

Spotting Trends and Patterns of Payment

Your job would be easy if your credit decisions were in set-it-and-forget-it mode — if nothing ever changed with your customers and payments rolled in as predicted. But extending credit is a process. Today’s good customer can quickly deteriorate and become your worst customer. To stay ahead of the game, even in the face of an industry slowdown, you must be prepared to speed up slow payers and short-circuit their lame excuses and broken promises.

Keeping an eye (and ear) on your customer

Even before your customer’s payments slow down, you may be able to discover trouble ahead. When your customer’s business falters, or it stumbles in its shipments to customers or its payments to other vendors, the word on the street may reflect those changes. Let your sales staff and other employees know that stories and rumors about customers should be relayed to your department.

In addition to rumors, you must watch for red flags — changes in your customer’s business and behaviors that suggest he’s having trouble or may be slow to pay. Head to “Spotting Dubious Changes and Handling Them Quickly,” later in this chapter, for more on identifying red flags.

You can monitor customers who purchase on credit by ordering an updated credit report on them, as we describe in Chapter 3. If you participate in trade groups such as the National Association of Credit Management (NACM), you may be able to find out about your customer’s paying habits toward other suppliers before payments to you slow down. Chapter 11 gives you more information about commercial credit bureaus, as well as their Web site URLs for easy access.

Investigate any causes for concern you uncover. Sure, sometimes you find that you’re dealing with an unfounded rumor, but sometimes seeing the smoke helps you keep your company’s finances out of the fire.

Monitoring industry trends and bracing for slowdowns

One of the five Cs of collection (which we outline in Chapter 2) is conditions. General conditions in the industry you serve or the overall economic conditions in the state or national economy can result in deterioration of paying habits. Even your best payers, including long-standing and loyal customers, may slow down their payments when conditions worsen.

When a customer’s sales decline, its managers may be uncertain about when — or whether — it will rebound. It’s not unusual for top executives under those pressures to shout orders to “conserve cash!” That’s not good news for you: When your customer starts hoarding cash, it may drag out payment of its outstanding bills. Your customer may even suggest that you should be a “team player” and go along with the slow pay because, after all, you want her future business when her sales rebound.

How you respond here is critical. If you tell your customer she’s no longer creditworthy (something she’ll infer if you cut back her credit limit), your future sales to that customer may very well decline. You must decide whether possible future sales will make up for the deteriorating paying habits. If you sense sales are rebounding and confidence is returning in the industry or general economy, you may go along with the concept of being a team player and extend terms beyond your immediate comfort level. But if your instinct tells you that conditions aren’t improving and that uncertainty remains, stick to your guns and cut back your customer’s credit.

When economic conditions are so bad that your good customers show deterioration in their payment habits and call on you to be a team player, things are probably worse with your not-so-good paying (marginal) customers. Watch them like a hawk. The team player strategy won’t work for your marginal customers.

Regardless of volume, you can’t earn a profit if your products or services are underpriced or the customer isn’t paying open invoices on time. Sales volume becomes almost irrelevant when your customer isn’t paying.

Speeding up slow payers

Sometimes you want to go over to your customer’s office, locate the checkbook, and hand someone a check to fill out for payment on outstanding invoices. But you can’t do that, so instead you need a system to closely monitor progress on the account and to communicate with the customer as often as necessary to keep the payments coming in on time. You may even look at this as a training process: You’re training your customers to respect your selling terms.

Starting with a letter

As soon as your customer’s aging sheet (as we discuss and illustrate in Chapter 4, Figure 4-1) shows any sign of slowness, contact the customer in writing. At this stage, your letter is just a gentle reminder, consistent with maintaining good customer relations. After all, the customer may have simply forgotten to make the payment. See Chapter 7, Figure 7-1.

Form 7-1 on the CD provides a template for a contact letter. You may contact your customer by the means you traditionally use for important communications, including courier service, mail, fax, or e-mail. But whatever you use, don’t forget the paper trail. Request delivery confirmation for e-mails, keep fax confirmation sheets, and consider using certified mail or getting delivery confirmation if there’s any possibility of getting the age-old excuse: “I never got it.” (And unfortunately, there usually is.)

Following up with a phone call

If the letter doesn’t result in payment, your next contact is just as polite but should be made by phone. Of all the ways to communicate with customers, the two most effective are still two of the oldest: face-to-face contact and the telephone. In years gone by, in-house bill collectors were commonplace, and a lot of shoe leather was expended knocking on doors and collecting accounts in person. In modern business, with many or most customers, face-to-face contact is impractical or even impossible. Fortunately, the telephone can be almost as effective as face-to-face contact. Communicating by phone with the person who has authority to write you a check is an effective way to secure payment. We describe techniques for collection by telephone in Chapter 8.

Reacting to customers’ excuses, bad habits, and broken promises

Your polite reminder letter and, if necessary, your follow-up phone call help you keep your otherwise good paying customers in line. At the same time, your customer’s reaction lets you know whether it’s going to keep its commitments to you. For example, if you contact the accounts payable manager on Tuesday and he tells you that he put a check in the mail to you that day, you should have the check in your hands within a few days. If it doesn’t arrive, although you’ll follow up just in case the check truly got lost in the mail, the odds are greater that the customer has simply broken his promise to you.

When your customer lies to you and violates the trust that underlies your relationship, strong reaction is required. You must question whether the customer should get any further extensions of credit, and you must remain wary of the customer even if it pays its balance in full.

Spotting Dubious Changes and Handling Them Quickly

When it comes to collecting payment from customers, it’s much better to be proactive than reactive. Simply put, you stay ahead of the game by spotting problem areas early and following up with quick action. The biggest red flags of potential collection trouble arise from change. The following sections outline some red flags to be on the lookout for and what action to take when you spot them.

Changes in ownership of a client business

Detecting a change in ownership may be tougher than you think. To avoid losing business or customer confidence, the new owners typically keep the same company name. Most often, the new owners want the public to believe nothing has changed — that it’s business as usual.

For people in credit and collections, the most dramatic event that can occur after a change of ownership is a refusal by the new owners to pay debts incurred by the prior owners. Fortunately, most buyers understand their obligations and want to maintain good relations with their vendors. To your benefit, states have laws that help protect creditors when businesses are sold.

Even when the new owners accept responsibility for payment of old debts, changes in ownership can significantly affect bill-paying habits.

Changes in ownership are a key reason to periodically have your clients submit a new credit application (see Form 3-1, which we discuss in Chapter 3). The application confirms the name of the business entity and identifies its owners.

Changes of address or phone number

Your customer’s change of address or phone number is a significant event. It may reflect relocation to a larger, better facility, but it can also reflect new ownership or problems with a landlord. Contact your customer promptly to find out what changes have occurred and why it has a new address or phone number. If your customer doesn’t notify you in advance, you have every right to be suspicious about why it didn’t inform you of its new contact information.

Watch for the following trends in business addresses and phone numbers:

Use of a post office box: Many small- and medium-sized businesses use a post office box or the address of a mail-drop service (such as a UPS Store) instead of providing their true physical address. Sometimes the address they provide looks like a physical address, with the post office box described as a “suite.”

It’s much easier for a customer to avoid collection if it doesn’t disclose its physical address to you. Your credit application should require that a physical address be disclosed in addition to the customer’s post office box or a mail drop address.

Use of call forwarding: Historically, you could pinpoint the location of a business through its area code and phone number, but now a phone number may be forwarded anywhere in the world.

You can verify an address using a post office confirmation of address form, provided on the CD (Form 5-2). You can also use the free online services available through Melissa Data Corp’s Web site (www.melissadata.com). Click “Free Lookups.” Using, for example, the “U.S. Addresses” lookup, if you type in the address of a UPS Store, you not only find out that a private mailbox number is required for mail delivery to that address, you can also see a list of businesses that use it as their mailing address. Although no tool is perfect, even with modest effort, you can find out whether your customer is being honest about its address.

Changes in order volume

Your protocol for monitoring customers should include tracking the size and frequency of orders. Most often, customers that maintain a steady volume of orders with you also maintain good paying habits. In contrast,

A decline in orders often precedes a decline in payment diligence.

An unexpected increase in orders, particularly from a customer that’s relatively new to you, may indicate that the customer is overextending itself, and at times may be part of a scheme to defraud you.

Maintain good communication with your customers. Have somebody, most likely through your sales department, make a friendly inquiry about the changes in sales. A tactful inquiry doesn’t take much time and, as they say, “better safe than sorry.”

Changes in financial condition

Even before you see changes in sales volume, you can predict what lies ahead for your customer by monitoring your customers’ financial condition. Should you spot financial deterioration, such as a decline in profitability over time, deterioration in paying habits almost always follows. Similarly, the financials should reflect an ability to pay for increased orders made on credit.

Insist on receiving regular updates of financial statements, including balance sheets and operating statements (refer to Chapter 3). You don’t want to have too much credit exposure to a customer on the brink of financial collapse.

Changes in customer attitude

A change in a customer’s attitude — even a subtle change — may be very significant. For example, if your customer suddenly disputes the accuracy of your billing or starts nitpicking fairly minor issues, that change may signal that the customer has cash flow problems that will result in slower payment. The complaints may be an attempt to justify slow payments and throw up a smokescreen to keep you from figuring out that the company’s in trouble.

Again, maintain an open line of communication with your customer. Seek quick resolution of complaints, especially over minor issues. After those issues are resolved to the customer’s satisfaction, bill paying should return to normal promptness. If it doesn’t, the red flag is up, and your instincts should tell you to be cautious with any future extensions of credit.

Changes in your customer’s understanding of purchase or credit terms

What is crystal clear to one person may seem fuzzy to another. But when it comes to collecting a balance that is growing more delinquent each day, another factor may be involved: the convenient loss of memory about credit terms and conditions. Consider a customer who, 60 days after receiving your product, calls and says she hasn’t used the shipment and wants to return it. It’s still in original condition, in the original packaging, and can be resold. However, she was supposed to contact you for any rejections and returns in a reasonable time after delivery, not 60 days later! But your agreement was oral, not in writing. You respond to the customer by describing the time frame for returns that you believe to be reasonable under the circumstances (the law allows for a reasonable time to make the return), and state that you believe that time has expired, meaning the customer needs to pay for the product.

You want to resolve any issues for this delivery, but also for any future orders. Is there really a question about the product or other circumstance that may justify a return, or is the customer using this whole return business as a stall to avoid paying the bill on time? If you believe the customer is stalling, you need to tell the customer that it’s too late to make returns and payment is expected within the week.

You may have heard the old saying that faded ink on paper is better than a faded memory. Although it’s not always possible, try to get things in writing whenever you can. When confronted with a customer’s faded memory regarding any of your terms of business, you can pull out the documentation and fax it over as a reminder.

Dealing with the Elusive Customer

After your customer’s paying habits deteriorate, he may become elusive and avoid communication. Rather than picking up the phone and discussing the account, he lets your calls go straight to voice mail and doesn’t return them. On occasion, the customer’s voice mailbox is full and can accept no further calls. In the following sections, we give you some tips and tricks for reaching an elusive customer.

Elusion is a definite red flag. Put the customer at the top of your list for monitoring payments and exercise extreme caution when considering any further extensions of credit.

Breaking free from voice mail jail

Voice mail is convenient. You can contact somebody and, if she’s not in, leave a message and move on to other business. But despite that convenience, voice mail can also be a bear. When things go well, it can be a headache to navigate a customer’s voice mail system to reach the person you want to talk to. You don’t always know exactly whom you want to speak with, and even if you do, you don’t always know how to spell the person’s last name (or first name) as the machine demands! And what happens when you hit the best key ever invented for these situations: the 0 to request the operator, only to find the system lacks that feature.

When your customer is using voice mail to avoid you, that headache kicks up to the migraine level. How do you reach the person you want to talk to — someone who can write a check?

Sometimes it seems that poorly designed voice mail systems were invented for customers who want to show the world they’re still in business and have a working phone but don’t want any human contact. It’s much easier for customers to stall payment if you can’t reach them. They may even claim they didn’t get your message, despite the assurance from their voice mail system’s friendly computer voice that “your message has been delivered.”

Oh, and the final insult with voice mail: When your contact person’s box is full and won’t accept any new messages, you’ve just wasted the last five minutes. Good thing phones are built of sturdy plastic and can withstand the occasional slamming when you’re stuck in this no man’s land of voice mail jail.

Some possible ways to work around voice mail jail:

Sidestep the system. Most folks have cellular phones. Try to get the cellphone number of your contact person. If at any time in your relationship with a customer you get a contact person’s cellphone number, make sure you record it in your customer’s credit file. Although not foolproof (cellphones have voice mail and Caller ID as well), sometimes your contact person will take a direct call.

Bluff your way through. Try to get a human, any human, on the phone. Hit buttons until you get someone! Then, even if you don’t know the spelling or exact pronunciation of the name of your contact, you can slur your words enough to get it close, so the person answering says, “Oh, you must mean Joan, not Jean or Gene or whatever you said . . .”

And people who don’t work collections wonder why we mumble to ourselves sometimes.

Detouring around the disconnected phone

What could possibly be worse than voice mail jail? That’s easy: a disconnected phone. In business, a disconnected phone is usually the kiss of death. Who can stay in business for long with no telephone?

The disconnected phone is a major frustration, but the phone may not be the only way to communicate with the customer. Possible quick solutions include

Showing up on the debtor’s doorstep: Visiting your debtor may result .in meaningful face-to-face communication, but there are potential drawbacks:

• The debtor is gone: Sometimes the debtor’s address is no longer valid, and driving to the location is a waste of time. Still, if you’ve made the trip, check to see whether there’s a sign posted (“we’ve moved to . . .”), and go next door and see whether the neighboring house or business has any information that may help you find the debtor.

• Angry confrontations: Upon arrival, rather than getting paid, you may discover that the debtor prefers to engage you in a verbal or physical battle. Once, when I visited a debtor’s place of business just to get a sense of what it looked like, a guy charged at me and demanded that I leave. I couldn’t calm him down, so I left.

E-mailing: Look for an e-mail address on the customer’s credit application, letterhead, purchase orders, or Web site.

Faxing: Sometimes even when the voice line is down, the fax machine still works. A fax number may also appear on letterhead, Web sites, or credit applications.

Texting: Even if his voice mailbox is full, your contact may still accept a text message.

Screaming: Very, very, very loudly.

Okay, that last one probably won’t work. But if getting a phone number or address could get your collection efforts back on track, we discuss skip tracing in detail in Chapter 12.