What to do when customers do not pay on time? A proactive perspective

You have managed to get the customer, agree on the deliverables and still you cannot collect your fees. Your customer is not returning your calls. Is there something you can do to solve this out?

There is only one way you can deal with collections, and this is professionally. The first level is strategic. You need to set the frame that you are willing to work. What kind of customers will you target? What is the maximum amount of risk you are willing to take? How much finance can you afford?

You are considering starting business with a new customer. That is great, but what do you really know for each customer? Do you know the business or financial background? Does the customer have a solid credit score? Are financial institutions willing to lend money and if yes under what terms? Have you even checked if this customer has a valid tax identification number? If no bank is willing to lend money because of low credit score, why should you sell on credit? Learn your customer before you start working with!

The second point is quantifying the risk you are willing to take. Once you decide to start selling on credit, then you must quantify the maximum amount of risk. You must come up with the number you are willing to sacrifice. Why should you do this? Selling on credit by default means that it is not 100% certain that you will get paid! This is certain only if you pay on cash and before you deliver. So, the first step is to decide how much are you willing to risk.

The next step is to check your cash flow. How much money do you have available to finance sales on credit? Why is this important? Keep on mind expenses continue to run regardless of whether you are collecting or not. You must pay rent, utilities and payroll. If you purchase merchandise, then your suppliers might ask for their money. So, if you agree on 30 days payment, then this means that you will not get your money sooner than 30 days. Do you have the funds available to finance all the expenses for these 30 days?

Coming to the tactical level, you must consider both sides. What is your process for initiating a business relationship? Do you have anything written or is the communication only verbal? How do you validate your presence in this relationship? What are the proposed terms from your side? Do you have critical milestones for both you and your customer? Do you agree what will happen if a party does not meet a deadline or a deliverable? Do you agree on the payment terms?

Let’s go deeper on the tactical level. If you do not consider that it is essential to have the agreement in writing, then what makes you believe that your customer will consider essential to follow up on payments? Having everything written helps both parties have a mutual understanding on what exactly they agree on. What is expected from each one and on what date.

Examples:

Let us consider that you are running a social media company.

you have agreed to work on social marketing for a corporate customer. This might include a one-time work, such as initiating social media as well as running the marketing campaign for two platforms for three months in promoting a new product line. You have in writing agreed the following deliverables:

- Social media initialization 30 days after signing

- Posting from day 31 up to day 120 (approximately 1 weekly post)

- Payment terms 20% at the beginning of the collaboration, 30% after initialization, 30% after day 60, 20% after day 120

What is wrong about this agreement? There are many missing points, not only one. Who will approve the quality of the deliverable? What determines a satisfactory deliverable outcome? Who will have the final decision on changing the strategy of this communication project? What happens if the outcome is not satisfactory?

How to be proactive? Firstly, agree on all aspects of the deliverables. your company is there to provide a service to another company. The outcome of this service must be aligned with the strategy and operations of that company. So, agree on what is the objective of the collaboration. Is it shares, comments, emails, views or some other metric? If you have on mind other side costs, then bring it up. How much advertising is the customer willing to take?

Secondly, agree on what happens if things don’t work out as expected. For instance, the marketing research of the customer might have miscalculated the expected impact of the campaign. What will happen if the numbers don’t add up? You will not get paid at all or will you get a portion of the agreed fees? And if yes how much? Time is money, so what is the deadline for delivering? Likewise, what is the deadline for paying? If one of these deadlines don’t work out, what are the penalties? Are these well documented and reviewed by an experienced lawyer? If you consider that you are not well treated, are you willing to enforce the contract?

Let’s us consider you are running a B2B consumer goods company. you have multiple points of sale and now you are discussing with a major retailer on starting collaboration. That sounds great right? Well, no, depending on the agreed terms.

Go through the entire agreement, every little detail. Where will you deliver goods, who will bear the cost of unloading and storing up to selling? How much is the entry fee? How much are the fees regarding shelf positioning and intra store promoting? On the other hand, what is the agreed selling price? What are the rebates and discounts? Who is responsible for contacting and reconciling? What are the main rebate and discount reasons that the client will not pay an invoice? What is the payment approval process and how long does it take from approving into transferring money?

As your goal is to sell and collect, on the other side of the fence, there is a group of professionals trained into finding any errors possible that could slow down the process of the payment. You must see the big picture. If you are dealing with a 100 M USD retailer with monthly purchases of 7 M USD, managing to stall a payment to suppliers for one month, 30 days, then this could lead to cash savings for some millions USD for that month.

Go through your collection’s agreement. If you agree 60 days (always in writing) and you understand that the customer has a standard process another 30 days for approving and processing the payment, then you have agreed in 90 days.

Go through your finances. How much risk can you afford to take and what is the maximum amount of credit you can grant, without compromising the viability of your company and your health?

Another wonderful example is construction projects. There are so many parameters involved that it might be a challenge. So, suppose you run a company that provides equipment that need to be installed on buildings. So, your sales channel refers to technical or construction companies.

if you are selling customized product, you must have guarantees before start manufacturing. Clearly you must have in writing agreed and accepted all technical details, performance and certificates of the agreed equipment. It must be certain what is the deliverable.

You must have a prepayment of 30% - 40% upon signature. You should have another payment of 30% upon delivering and accept a 10% - 20% after a trial period (30 – 90 days depending on the equipment and industry). Always ask for some sort of guarantee in case the project stops or one of the key players defaults.

In case you are selling standardized equipment then you might not have to go through such complex processes. You should agree on some prepayment beforehand and the remaining upon delivery (before installation). You must have powerful reputation of guarantee, otherwise the customer will not accept it.