Can Your Company Afford to Be a Bank?

Many small and mid-size companies do not realize it, but they are, in effect, bankers to slow-paying customers. Not only is this unnoticed calamity causing cash-flow problems for businesses, but many also do not fully understand the impact this unacknowledged “financing” has on their companies. Compensating for slow-paying customers can dramatically affect the profitability of a business.

Many small and mid-size companies do not realize it, but they are, in effect, bankers to slow-paying customers. Not only is this unnoticed calamity causing cash-flow problems for businesses, but many also do not fully understand the impact this unacknowledged “financing” has on their companies. Compensating for slow-paying customers can dramatically affect the profitability of a business.

Many business owners talk themselves into allowing slow payments for various reasons. Owners may do it as a favor to a customer. Or, perhaps they believe it will create a reciprocal bond with the customer to whom they extend longer payment terms. Sadly, most owners discover their good intentions are never repaid — monetarily or figuratively.

Once a business owner realizes slow-paying customers need to be watched carefully, they usually take the wrong action. The first thing many owners do is to advance the collection process and have the customer pay more quickly or more often with smaller amounts. This may work with specific cases, but it can be time consuming and will not correct the real problem because the real problem is not so much with the customer who is slow paying as it is with the seller's company that allowed it to happen. A much better strategic approach to the slow-payment issue is to review the entire payment sequence.

An activity known as “process mapping” will lead the business owner to the root cause of the problem. More often than business owners ever expect, this process shows the real problem to be internal — the manner in which the business credit department or credit function operates.

Slow-paying customers are allowed to occur. The solution is to disallow them. How?

This can happen by bringing a disciplined, formal approach to what the business owner often realizes has become a very informal process.

To solve the problem, the George S. May International Co. offers these five steps to bring discipline to the collection process and create a formal credit procedure:

  1. Establish credit reports with customers and track credit history: This is not difficult. Businesses can do it for themselves by simply awarding points to the key line items on a credit application. Point totals equate to how much credit is provided. This points system solves a number of problems. First, it sets a standard for all customers — no favorites. Second, it allows the credit function to operate independently from the business owner. Third, having been freed from the credit evaluation task, the business owner can focus on larger issues.

  2. Act on infractions immediately: Review payment reports daily to evaluate any issues or trends that the reports show. If customers are behind on a payment, it is time to give them a call.

  3. Follow a documented and carefully scripted collection procedure: In our consulting with businesses, we have found that the collection problems occur because the process for collecting is lax and sometimes even haphazard. Even though every business owner will state that he or she is in business to make a profit, it is amazing how many don't realize the profit they are missing through lack of procedures and having the procedures followed. Having scripted actions and documentation also helps the business avoid problems with possible accusations that a customer was not treated equally or fairly.

  4. Institute and promote a discount program for early payments: This is an excellent method of not only ensuring you get your money, but also a way to reward customers with something that is meaningful — a discount. Structured properly, a discount program pays for itself.

  5. Collection calls must be made by a trained collection person: The only purpose of the call is to collect what is owed to the business, therefore collections must not be made by a customer service representative. While collection calls should always be polite, it must be remembered that if a customer is slow paying, there is a reason. If a customer is in trouble, a responsible business owner may wish to offer reasonable extended terms based on the situation and credit scores. However, the owner's primary responsibility is to ensure that a customer's troubles do not entrap another business.

Paul Rauseo is managing director of the George S. May International Company, one of the most established management consulting firms in the United States. Since 1925, it has been helping business owners improve their operations, profits, efficiency and effectiveness. The company is headquartered in Park Ridge, Ill. For more information, visit www.georgesmay.com.