No pay arrangements in advance, no work

IN PREPARATION for writing this column, I visited extensively with one of the sharpest financial operators I know specializing in service contracting. I needed to get an update on his tough-minded credit philosophy. His claim to fame is having virtually no accounts receivables! I told him I was writing about credit and collections and that I needed his latest insights on the subject. His business

IN PREPARATION for writing this column, I visited extensively with one of the sharpest financial operators I know specializing in service contracting. I needed to get an update on his tough-minded credit philosophy. His claim to fame is having virtually no accounts receivables! I told him I was writing about credit and collections and that I needed his latest insights on the subject.

His business is service, repair and retrofit. I asked him if he is still as tough as he was last time we discussed the subject.

His response was convincing. You should ask the last person he put in jail for writing a bum check for a replacement installation.

Fundamentally, his company has no accounts receivable. When any call is dispatched, the company knows how the bill will be paid at the time of the delivery. There is an approved credit card authorization, there is a check that can be picked up immediately, or the financing has been prearranged and, just as important, there is no accounts receivable file generated.

Think of the joy that comes from going to work in the morning knowing that you do not have to worry about collecting money for this week's payroll or for anything else! If you did the work, you know you have payment in full.

So someone stiffed this company with a bad check. It happens. If the company is suspicious about a check, it calls the bank to confirm that money is available in the account. In this instance the company was not suspicious but, nonetheless, the check didn't clear. In the state where this business operates, this bounced check is a felony and the company had the person arrested. The person went to jail. And the installing crew went to the location of the installation, accompanied by two policemen, and removed the just-installed unit.

This may sound harsh to you, but think of the alternatives. This person wrote a bad check. When asked to make the check good, the customer said he couldn't. The person stole from my respected friend and seemed to be defiant about it.

"We don't mess with them, they tried to steal from us and, if we can put them in jail, we will," my friend told me. "While it costs us money to do this, we remove our products and do so in the most direct and legal way."

For this company, after having been stiffed, it was no longer a matter of trying to collect the money. It was a strong statement both internally and externally that if you write a bad check with intent to defraud, you will be arrested.


Fundamentally, his company has no accounts receivable.


What would you do? Listen to the sad story from the person needing the service but never intending to pay? Would you go on bended knee pleading for him to work something out? This bum check writer has no credit ability and certainly no credibility! Would you carry the account on your books for years while he sometimes pays $5 or $10 a week? This is a study in how you build a bad debt file, not how you run a profitable business.

You should never, ever do any work without knowing before the work is started how you will be paid.

Those of you who do the "big stuff" may think you have a different problem, but mostly it is the same problem. You are swimming with the sharks of the contracting world and when convenient, you will be the next meal. You keep hoping that this job will come through OK even knowing that the general contractor uses the financial resources of the subs instead of going to the bank for short-term construction funds.

Time after time I have seen contractors get caught up trying to stay in the good graces of some deadbeat general contractor, knowing that his game plan is to stiff the subs after they are too weak to be of any further use.

If you want to swim with the sharks, be sure you have the advice and counsel of a good credit and collections attorney and take all legal protections available to you under the law. I know how tough this can be and I know I'll hear many reasons why you should sign off on your lien waiver before you collect the money. Just be sure that that you can afford to lose the money because quite frequently you are signing off on all possibility that you will ever collect it.

Smart contractors have worked out the ability to accept all credit cards. This is not a cost to you. It is a cost to your customers because you include all costs in the prices you quote.

If you've used credit cards in any other manner you are making a big mistake. An example that comes to mind is the sharp operator who decidedto use the credit card approval as a credit check and then carry the debt in his company.

The defective reasoning was that if the credit card people thought the customer was "good," why not pick up that extra percent rather than pay it? You will never have the collection power of a credit card company!

Credit cards give you a quick, sure collection and can sometimes be used for large amounts. The credit card charge is a cost of doing business and it is passed on to the customer. If you say you can't charge enough to cover the expense of credit cards, then my advice to you, quite simply, is get out of the business.

You don't have even a basic understanding of business practice and profit generation.

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TAGS: Management