Chapter 21

Ten Tips for Maintaining Cash Flow

In This Chapter

Maintaining good credit policies and procedures

Dealing with slow-paying customers

Communicating with clients precisely and professionally

Even in good economic times, cash flow can be difficult to manage. And when the going gets rough . . . well . . . maintaining cash flow can be a real challenge. In a tough economic climate, the pressure’s on to improve liquidity and to get the cash you need to pay your bills.

One really good way to maintain cash flow is to implement and stick to solid credit and collection policies. The tips that follow help you develop good policies and keep the cash rolling in. They’re presented in no particular order, as we consider all of them to directly impact your company’s cash flow.

Reviewing Your Credit Policies

Periodically review your credit policies, particularly those relating to new customers. Established clients are a bit trickier, as most won’t be pleased with new credit restrictions, but you have to restrict credit when your industry changes or when a customer’s business seems to be faltering. If you diplomatically explain why you’re tightening up credit policies, they’ll understand (whether or not they admit it). Make sure that all employees involved in the sales process are trained in your credit policies and procedures, as we outline in Chapter 4, and follow up to be sure that they’re following proper procedures.

Here are some tips for reviewing credit policies:

Review interest rates and penalties applied to delinquent balances to make sure they’re consistent with the law.

Review and update the language of your existing credit department documents, including the credit application and form correspondence, to make sure that they’re correct and complete.

Modernize antiquated language in older collection letters and forms that you use, as older forms may not reflect changes in consumer and collections laws.

Don’t hesitate to get help from your lawyer in updating documents; you want to avoid running afoul of laws limiting interest and late charges, and you don’t want to accidentally change the legal meaning or effect of your contracts and forms when updating the language.

Knowing Your Customers — Especially New Customers

When working with new clients, your primary goal is to establish a potential long-term relationship, but at the same time you must minimize risk. The obvious result of credit risk gone bad is limited cash flow.

You can avoid problems by sticking firmly to your credit policies, requiring that your customers return credit applications and financial statements before you extend credit, and setting a schedule to review and update customer information.

Handling client credit issues is literally a never-ending training process — you learn as you go along. If you establish and adhere to good credit extension policies, you’re less likely to find yourself learning from your mistakes.

Monitoring Customers Who Pay Slowly

Ignoring a deterioration in payment habits is a recipe for disaster. Any negative change, even a payment that arrives a day late from a customer who always pays on time, could be a storm cloud on the horizon. Whether they’re new customers or among your most established clients, all your customers must understand that you expect them to pay on time, and that delinquent payments aren’t acceptable to your company.

It’s essential to stay in constant communication with customers who pay slowly and to regularly remind them of your expectations of prompt payment. Maintain good billing practices, as we outline in Chapter 4, and monitor your accounts, as we describe in Chapter 5, to avoid the headaches of delinquent accounts.

Using All Your Leverage: Cutting Off Slow-Paying Customers

When you want to exert pressure on slow-paying customers, you have two effective options:

Threaten to cut off your services or the flow of your product to the customer.

Cut off your products or services.

Force customers to consider the alternatives: pay you what they owe or find alternative sources of products or services in a hurry. But don’t fret too much about the competition stepping into your shoes. The transition alone may cause your client to miss deliveries and deadlines for his own customers. And besides, why not let a slow-paying (or deadbeat) customer become somebody else’s problem?

If you know the customer and feel that some extra slack may get her through a rough spot, that’s one thing. But if it’s a new customer, a customer with a history of bad payment habits, or a customer who appears to be failing in business, let somebody else deal with the unpaid bills.

Enforcing Payment Plans

What does it mean that your customer is on a payment plan? It means he has already missed payment deadlines. He violated the original invoice terms, necessitating your setting up the payment plan. The violation of a payment plan thus represents more than one broken promise. This time it’s a breakdown of trust that you must deal with swiftly and aggressively to get your customer back on the plan. (Chapter 10 includes instructions and tips on setting up payment plans with delinquent customers.)

Let your client know that you’re not flexible. Delinquent payments must be promptly paid up, and if that doesn’t happen, you may have to place the account for collection. After all, nothing is as destructive to your cash flow as a customer who repeatedly breaks promises of payment.

Cultivating New Customers Constantly to Replace Bad Payers

Take a look at your customers — how many of them are long term? Do some of your clients represent 10 percent, 20 percent, 30 percent, or more of your customer base? What happens if one of your larger customers slows down its payments, goes out of business, or switches to a competitor?

No matter how established you are, or how comfortable you are with your level of business, bringing in new customers enables you to maintain your cash flow even as you show your bad payers to the door (and even if some of your best customers change vendors).

Tracking the Age of Your Accounts Receivable

Your aging sheets (summaries of client accounts that show, at a glance, how current their payments are) are important tools in maintaining your cash flow:

Aging sheets provide a visual reminder to slow-paying customers that they’re behind in their payments.

Aging sheets provide an alert or warning to your credit department that a customer’s payment history needs attention.

If you use your accounts receivable as security for loans or lines of credit, or if you work with factors (companies that purchase accounts receivable), your lenders and factors will monitor the aging of your accounts receivable as a condition of your loan or factoring agreements.

As payments fall behind, your cash flow may be harmed at both ends: You aren’t getting cash from your customer, and your lenders may perceive you as a higher risk and reduce your credit limit or increase interest rates. To avoid that, keep aging to a minimum by taking strong action when a customer’s payment habits deteriorate. For best results, act quickly when your customer’s payments first fall behind. When your aging sheet shows that your customer is seriously behind, you need to consider stronger options, including referring the account to a professional collector. We discuss the use of aging sheets in detail in Chapter 4.

Being Specific in Your Communications

When money’s involved, you should be thinking in terms of dollars and deadlines. Your invoices reflect when payment is due. Your credit agreements indicate what amount of credit is available and what interest rates you charge. All that’s a matter of routine.

But what if you’re communicating with a late-paying customer? When you talk to a debtor and arrange a payment agreement, make sure you get a commitment for payment of a specific amount by a specific date. If your debtor agrees to pay no less than $2,000 by February 6, that’s a very specific communication, and it’s easy to measure whether it’s being honored. Each agreement is, in essence, a test of your debtor. If you receive less money or no money at all on the assigned due date, your debtor failed the test. You use that knowledge to decide whether to try again or to shift to more formal collections.

What if your customer refuses to agree to any specifics? You have a red flag situation and must consider taking strong, immediate action on the account.

Keeping Your Credibility and Avoiding Idle Threats

Threats like, “I’m going to sue you with the biggest lawsuit you’ve ever seen if you don’t send me my $500 by Friday,” or, “I’m cutting you off Friday and you’ll never purchase from us again, unless I receive $500 . . .” are more often made by a hotheaded credit executive than by a calm collections professional.

What can happen if you make a hollow threat?

If the debtor doesn’t believe you, or you don’t in fact do what you threatened, expect further abuses of your credit policies by your slow-paying customer, as you’ll have thrown away your credibility.

Threats made in the heat of the moment can alienate good customers and cause them to take their business elsewhere.

Either way, cash flow suffers.

Being on the Lookout for Red Flag Situations

Your customer has been buying from your firm for 20 years. You’ve been to dinner parties at his house. He sent a beautiful gift for your daughter’s wedding. He always sends a card at Christmas. But he’s getting slower and slower in paying his bills. Have you noticed?

Don’t get us wrong here — it’s not always a personal relationship that causes you to overlook the obvious. In fact, with most businesses, a large-scale inattention to detail is the culprit. But you’ve read this entire book and taken every word to heart, right? So you’ve established credit and billing policies, and you keep a close eye on all your customers’ aging sheets. Still, when it’s a large customer, a good customer, or a friend, it’s easy to let things slide. And it can be hard to confront somebody you’ve been doing business with for 20 years and (tactfully) say words that amount to, “You’re late in your payments so I need an updated credit application and financials.”

We detail in Chapter 5 the red flags that indicate that trouble’s on the horizon. They apply to every one of your customers. To maintain your cash flow, don’t let personal feelings, the length of your relationship, or a casual attitude toward somebody you still think of as a good customer get in the way of enforcing your credit policies. As they say, it’s just business.

Some customers experience temporary setbacks or twists and turns in the road that nobody anticipates. When your client is describing the unexpected, hear her out. You may have some ideas that can help her, or you may learn something that could help your other clients (or you) avoid a similar peril. Before you get off the phone, consider what your customer has said, your experiences with the customer, and trends in the industry. Then suggest a payment resolution based on your assessment of the customer and your company’s credit policies.

If the customer has already broken many promises, your “payment plan” may simply be to require payment in full by a stated deadline, and if the bill’s not paid, you’ll put the file into collections.