Sometimes, no matter what precautions you take or how well you manage your receivables, there are just some customers that won’t pay on time, even if at all. But, there’s still hope for you to get the money you deserve. Here are 5 ways to deal with late paying customers:
1. Factor the Invoice – A great option to get cash for your unpaid invoices is by factoring your invoice. When you factor your invoices, a “factor” buys these invoices at a discount, and then collects the full payment from your customer. This gives you cash in your hand immediately. The factor is paying you a percentage of the invoice paid value upfront, known as the advance (which is usually around 70-85% the invoice amount). The factor then holds onto the remainder, which will be paid to you upon fulfillment of the invoice, minus the charges or fees of the factors.
2. File a Lien – Mechanics liens are a special instrument for those businesses who are construction contractors or suppliers. “If a supplier or contractor furnishes services or materials to a construction project and is not paid, that supplier or contractor can generally file a mechanics lien to ‘secure’ the debt”, says Scott Wolfe Jr. In other words, the property becomes collateral to guarantee payment. A lien doesn’t send a property off to auction, but is the action to claim the job as collateral. In short, it puts your business in a “collectable position.”
3. Call a Lawyer – A good way to get a seriously delinquent account to pay is to have an attorney contact the debtor. As Justin Tenuto from Rocket Lawyer points out, “Sometimes, a professional correspondence from a practicing attorney will motivate your debtor to pay up. After all, debtors don’t want to end up before a judge, explaining their motives for not paying you.” If you think your customer needs just a little push, hiring a lawyer to make contact can be the key. However, be sure to perform a cost-benefit analysis to make sure the lawyer’s fee isn’t more than the debt you are looking to collect.
4. Hire a Collection Agency – Sometimes when you know there is no hope for a customer, it’s time to send them to a collection agency. Although collection agencies have a bad rap, the actions of some does not define them all. When you feel it’s time to send an account to collection, it’s all about performing the right due diligence on an agency. Be sure to ask the right questions when searching for an agency, so you’ll know they’ll treat your customers well. When you send your account to collections, be aware you will only pay if they collect. However, their fees run high. If they are successful, sometimes you can end up paying them 30% – 50% of the invoice. Only use a collection agency as a last resort.
5. Write It Off – If you determine a receivable is impossible to collect, you can write it off. The IRS requires the direct write-off method for receivables, and to reiterate, it can only be written off once you stop actively collecting. In fact, you will only need to report an estimate of how much you don’t think you’ll collect. You don’t have to guess who won’t pay you or what the exact amount that you aren’t paid will be. Just always use a conservative estimate. So, when do you decide it’s time to give up? Look at how long the account has been past due. If it’s older than 6 months, it’s safe to say it can’t be collected.
Nothing’s worse than a customer that won’t pay. However, if you get stuck with a deadbeat, remember your options!
However, we know that once you start a road trip, you may encounter unforeseen problems and opportunities. There may be construction detours, heavy rains that force you off the freeway or you remember this is a bluebonnet season and take a farm road to enjoy the view.
It is a bad plan that admits of no modification. We live in a dynamic world. Our customers change, their wants and desires change, and our competitors’ strategies change in response to our entry. Flexibility and mid-course correction based on new information are the hallmark of a good planning process.
In order to know if you are on track, you need sign posts. In business, they are known as Key Performance Indicators or KPIs. KPIs are used to assess the present state of the business and to prescribe a course of action.
The adage “What gets measured, gets done” is true. KPIs focus attention on the tasks and processes deemed most critical to the success of the business. KPIs are like levers you can pull to move the organization in new and different directions.
Accordingly, choosing the right KPIs is reliant upon having a good understanding of what is important to the organization. ‘What is important’ often depends on the department measuring the performance – the KPIs useful to finance will be quite different than the KPIs assigned to sales, for example.
Because of the need to develop a good understanding of what is important, performance indicator selection is often closely associated with the use of various techniques to assess the present state of the business, and its key activities. A very common way for choosing KPIs is to apply a management framework such as the balanced scorecard.
A company’s top management will analyze many areas of business operations, including:
FINANCIAL: Measures the economic impact of actions on growth and profitability
CUSTOMER: Measures the ability of an organization to provide quality goods and services that meet customer expectations
INTERNAL BUSINESS PROCESSES: Measures the internal business processes that create customer and shareholder satisfaction (project management, total quality management, Six Sigma).
LEARNING AND GROWTH: Measures the organizational environment that fosters change, innovation, information sharing and growth (staff morale, training, knowledge sharing).
View some examples of KPI’s used in various functions within a company.
FINANCIAL RATIOS: At times, it is more informative to look at ratios of two numbers and compare them to benchmarks in your industry.
Here are formulas for many standard ratios.
You should have a handful of KPIs that are appropriate for your own business and use them to measure the actual progress at least on a quarterly basis and make mid-course corrections if necessary.
Here are a few examples:
Possible Corrective Actions
If the key factors are better than expected, corrective action may still be required in the form of more rapid growth or raising prices.
There may be times when midcourse corrections are not easy or quick. You may find that you have focused on a wrong niche or a wrong location or a better financed competitor is trying to run you out of business. Targeting a new market niche or moving to a different location may not be easy, cheap or quick, but it must be considered as soon as possible before you run out of cash.
Proper preparation prevents poor performance but rigid adherence to a plan made obsolete by events is worse than no plan. A plan is as good as its underlying assumptions; all of which could change as you get new information. Flexibility and mid-course correction based on new information are the hallmark of a good planning process. Appropriate Score Card is a way to respond rapidly to an ever changing environment.