Managing Accounts Receivable: Because sales are meaningless when clients don't pay you.
In order to stay competitive, many business owners find it necessary to extend credit to customers. However, if you offer later payment options, it is crucial that you have a well-developed and communicated accounts receivable system.
Here we have listed a few elements of a successful A/R management plan, and how to implement them in your business.
Communication. It's said to be the key to a good relationship, and that can apply to business relationships as well as personal ones. Communicating well is key to managing receivables accounts. Let's look at the who, what, when, and how, of A/R communications.
Who? This seems obvious, enough...the customer, right? But, in reality, it's not just the customer with whom you are communicating. Assuming you're not a 1-person operation, you need to be in good communication with your employees or co-workers regarding what promises and agreements have been made with the customer. If you contact a customer on Tuesday afternoon regarding a past due invoice, and they just told your partner that morning that the check is in the mail, your entire company looks disorganized and unprofessional.
What? When alerting a customer to a past due payment, simply informing them of the amount owed is not the best option. Providing a detailed statement, possibly with an itemized duplicate of the referenced invoice, is far more helpful. Important information to include is the amount owed, days past due, what services were rendered, options for remitting payment, and contact information for questions regarding the account.
When? Generally, you would expect to increase contact as balances get further past due. A gentle reminder the day after the due date if payment has not yet been received is appropriate, with missives gradually becoming more frequent and insistent as the invoice gets to 15 days past due, 30 days past due, etc. (However, it would be best to avoid multiple communications a day, as that could constitute harassment.)
How? "The medium is the message". For an account that is just barely overdue, a mailed or emailed statement (as described above) might be enough of a reminder. If more time passes without payment or a response from the customer, a more direct phone call is in order. This leads us to our next element of a successful accounts receivable management system...
Delegation. To maintain a good working relationship with the customer, it is ideal if you can separate the less pleasant side of that relationship, collections, from the more positive side, which is the work and value you provide to the client.
Delineating separate avenues of communication between the service and payment sides of your business can help you achieve your A/R management goals without damaging the rapport you have built with your client. Large companies have entire Accounts Receivable departments, but small businesses rarely have that option.
However, if you have more than one employee, someone other than the client's primary contact could act as the accounts receivable delegate. If you're the sole employee, you can even do something as simple as set up a separate email. (For instance, if your email is "[email protected]", you could set up an email called "[email protected]".)
The key is to avoid marring interactions with the customer which could lead to continued or future work by derailing the conversation into payment discussion.
Documentation. Good documentation can prevent so many problems in every area of business, but especially in accounts receivable. Before a single customer is invoiced, your A/R plan should be formulated and written down so everyone in your business knows exactly what the payment terms are, who is responsible for contacting customers, what to do in case of a dispute, etc.
Payment terms should be made clear to the customer before services are rendered, and should then be reiterated on the invoice. If a balance does become overdue, remind customers of the payment terms, and document every communication with the customer regarding the overdue balance. Reference previous conversations about the account in new discussions about them. Established fact is far more effective in encouraging remittance than strong emotions or harsh words.
What should you do with a customer who isn't paying?
If the customer hasn't gone ghost on you (in other words, if they are still maintaining some form of contact with you), and would like to continue purchasing goods or services from you, do not cut them off. Cutting them off completely is a great way to ensure that they will do no further business from you, and will not pay you the money already owed.
However, do not provide any further service on credit. Request pre-payment for any further work you perform, then apply that payment to their outstanding balance. This allows you to maintain a working relationship with the customer and recoup the money you are owed.
How much are you paying for your free lunch?
"There's no such thing as a free lunch." Anyone who has taken even the most basic economics course has heard it. But what does it mean, exactly?
The "free lunch" idiom is frequently used to simplify the concept of opportunity cost, in that, even as you accept a free lunch, you miss out on other opportunities during that period of time. Investopedia defines opportunity cost as, "The cost of an alternative that must be forgone in order to pursue a certain action. Put another way, the benefits you could have received by taking an alternative action."
It's a fairly basic definition and it's one that most business owners understand...in theory. However, for many entrepreneurs, the desire to keep costs low can cycle into a "do-everything-yourself" mentality, which, in turn, lends to missed opportunities.
To better illustrate this issue, consider Janice, professional photographer (and fictional entrepreneur we created for this example).
After experiencing a great deal of amateur success, Janice has decided to become a professional photographer full-time, and open her own studio. She determines that her new business needs the following things:
- A photographer
- Photo editing
- Someone to answer the phone and schedule appointments
- A website
- Bookkeeping
None of this looks too hard to start with, and Janice figures she can handle most of it. She's got the photography and photo editing skills already and, until she can afford to hire a receptionist, she can just take business calls on her cell. There are plenty of places online where anyone can build a free website, and she can keep track of her own business financials throughout the year and figure it all out with TurboTax in April. For a great photographer and hard worker, this shouldn't be any problem.
Of course, things don't go as simply as Janice has predicted. Her phone rings with appointment requests while she's in the middle of sessions and, by the time she calls the prospective customer back, they have already booked with someone else. Her shoots run long because she has to change backdrops, arrange props, etc. by herself. Her days are so busy she has to stay up late working on photo editing. The website she built is...okay, but comes across as generic and slightly amateurish. She's not entirely sure how her bookkeeping as going because, with everything else going on, it's been the last thing on her mind.
On top of all that, she's started to notice that her business needs some things she hadn't planned for, including:
- Photographer's assistant
- Studio cleaning
- Basic legal documents
For the sake of comparison, let's assume Janice continues to do all of this herself. Let's look at how much money she is saving.
Receptionist - $9/hour
Website - $500
Bookkeeping - $500/month
Photographer's Assistant - $12/hour
Cleaning - $8/hour
Basic legal documents - $300
It looks like Janice has saved her business a lot of money through her strenuous efforts and "can-do" attitude. However, we have to factor in the opportunity costs.
Let's take a look at what each of these things Janice is doing herself, each "free lunch", cost:
Receptionist - Missed income from lost appointments; positive word-of-mouth; professional image
Website - Lack of professional image; loss of referrals; missed income
Bookkeeping - Missed deductions; increased risk of audit
Photographer's Assistant - Shoots take longer so fewer of them can be scheduled, leading to missed income
Cleaning - Time and energy diverted away from more profitable activities, such as photo editing and networking
Basic legal documents - Increased legal vulnerability; loss of time
So, when you weigh all the opportunities to genuinely build her business which Janice has lost while she was busy doing everything else, how much money did she really save?
Now, this isn't to say that you should farm out every task you dislike (particularly early on, when small businesses are susceptible to cash flow woes). However, it is key that, before committing yourself to something outside of your wheelhouse, you measure the benefits of DIY versus outsourcing. In many cases, the opportunity costs will be greater than you think.
How the Service Industry Prepares You for Entrepreneurship
Per the Department of Labor's Bureau of Labor Statistics, service industry jobs in America outnumber manufacturing jobs almost 10-to-1. In 2012, retail and hospitality employees numbered 28.6 million, with that number projected to grow to 31 million (a 10.7% increase) by 2022. Currently, almost 1-in-10 Americans work a service-based job.
With so many Americans in the service industry, it stands to reason that many of the entrepreneurs of the future are the retail and hospitality workers of today. All of us at The Bookkeeper have at one point in our lives bussed tables or ran a cash register. That's how we know there are several professional skills you develop in the service industry that better prepare you for life as an entrepreneur.
Service industry employees work with a sense of urgency. Few businesses are more fast-paced than a restaurant. Everyone, from the front-of-house to the kitchen, knows that tasks have to be completed immediately. The slightest delay in taking orders or prepping an entree can result in backlogs, unhappy customers, and decreased revenues. If you get anything resembling "down-time", you hustle to complete side work and other prep that can help you when you get busy again.
How can you make it work in entrepreneurship? Former service industry employees know how to keep busy. You do jobs as they come in, without putting off the more difficult or frustrating tasks. You are great at maximizing your free time, answering emails or promoting your business on social media in between meetings and assignments. Clients are often impressed at how quickly you complete projects and respond to their needs.
Working with urgency makes you better at prioritization. Three days before Christmas, the store is packed, the registers are backed up, three customers are waiting for help finding items, another customer is on phone line 1 while your district manager is waiting on line 2. What do you do first?
For someone who has never worked retail, this is the sort of nightmare scenario which makes the service industry seem all the more undesirable. For those of us who have been in this sort of situation, this hypothetical has an easy answer: Help the customers in the store first, then the customer on the phone, get back to the DM when you can. There's no way to please everyone right then, so deal with the immediate areas of need first.
How can you make it work in entrepreneurship? You learn what fires need to be put out immediately and which ones can smoke a little while longer. You have an innate knack for putting your to-do list in the perfect order so you can do all you need to while keeping everyone as happy as possible.
You develop customer service skills and a thick skin simultaneously. It is no secret that employees in the service industry are often treated terribly by customers. Service industry workers are frequently (sometimes daily) required to withstand being verbally berated, not only without retaliating, but smiling throughout and heartily apologizing afterward (regardless of whether they personally have done anything wrong). Over time, you get better at both anticipating customers' needs and moods (thus avoiding such tirades) and letting verbal abuse roll off your back.
How can you make it work in entrepreneurship? Many small business owners have an incident or two where they face unwarranted criticism, whether it be an unfair Yelp review or bad word-of-mouth from a client fired for non-payment. Though the initial desire may be to fire back at whoever is spreading lies and gossip about you, this rarely works out well. (See the Amy's Baking Company fiasco.)
The better (though less initially satisfying) option is to prove your disparagers wrong with your continued professionalism and exceptional customer service. By refusing to let others drag you down into the muck, you keep your company's reputation so sterling that no mud slung can stick to it.
You become prepared for anything. Anyone who has worked in the service industry for even a few months has at least one crazy story, something virtually unbelievable. I have several, but my favorite remains the customer who became disgruntled when she spilled her alcoholic beverage.
This was not in a restaurant. It was in a dog grooming salon.
She spilled her drink because she was carrying it in a regular, open-topped glass. Loose in her purse.
Again, this was an adult woman, and not a toddler. Concepts like "liquid" and "gravity" should not have been a mystery to her, yet she was shocked and infuriated (at me) that her mojito had tipped over and was soaking through the bottom of her very expensive shoulder bag.
How can you make it work in entrepreneurship? Once you have had the experience of fetching towels to help a woman clean rum out of the bottom of a Dolce & Gabbana bag, and have apologized because she didn't believe the towels looked clean enough, few things can throw you off your game anymore. Deadlines being moved up or employee sick days just become minor hiccups, instead of major obstacles, and you develop an air of unflappability that instills confidence in clients. Remaining composed in the face of extraordinary circumstances is a hallmark of a great entrepreneur, and surviving the service industry lets you enter the game with that skill already equipped.
The Financial Reasons Small Businesses Fail
Almost every entrepreneur has heard the statistic: 80% of small businesses fail. There are many reasons this happens, and can include everything from market slumps to lazy owners. To enumerate every way a business can go under would be an endless, impossible task.
However, there are a few financial characteristics frequently found in struggling businesses. Here are the most common financial reasons small businesses fail.
There's no plan. It's not uncommon to meet new small business owners who have a brilliant product idea, a well-developed marketing plan, a slick website, and not one thought given to their budget. We've already written on the tough financial questions to answer before starting your own business, but the importance of a solid financial bedrock cannot be overemphasized. A well-researched budget and fixed goals is the key to surviving that crucial first year in which most businesses go under. Great customer service and spot-on marketing are not enough to balance out shaky financials.
Speaking of customer service...
Poor credit management and pricing strategies are bad for everyone. No one craves popularity like an entrepreneur and, when your business's success is entwined with how well-liked you are, the urge to avoid offending anyone becomes even stronger. In the early days of a business, when there are only a few customers, there is a common impulse to let clients slide on late payments, or to offer frequent "friends and family" discounts. It's easy to justify this with the logic with the idea that you need to establish customer loyalty, and you can tighten the reins a bit when you have a solid customer base. There are a few reasons this doesn't work:
- Clients who don't pay on time aren't going to appreciate the slack you've given them in the past; they are going to resent the restrictions you enforce in the future.
- Likewise, your patrons who are just coming to you for the lowest price will quickly go elsewhere when your rates rise.
Lenient accounts receivable and cheap pricing might gain you a quick boost in early sales, but they are not a sustainable model. Delivering a product you can be proud of, at a price that is worth your hard work and can keep your business afloat (and actually requiring customers pay you that fair price) ensures that your customers the pleasure of patronizing your business for years to come. Because you have to remember...
Cash is king. Yes, it's a cliche, but that doesn't make it any less true. A great business model matters little if you run out of money before you can implement it. Managing cash flow is key to not just the health but the continued existence of your business. Here are a few of the most common cash pitfalls small businesses face:
1.) Insufficient capital. In all likelihood, your business will not be immediately profitable. So not only do you need enough cash to get your business started, but you need enough to allow yourself to operate at a loss for a while.
2.) Not having a large enough cash cushion. Think "Princess & the Pea" levels of padding. Regardless of how well you plan, the economy is unpredictable. Look to history for examples. No one expected the Boston Molasses flood which, in addition to the damage caused and lives lost, resulted in a nearly $11M settlement (in today's money) for the responsible company.
3.) Over-investing in fixed assets. It's great to plan for the long-term but, if you don't plan for the short-term as well, your business will not get a long-term. Sacrificing too much of your cash for something like manufacturing equipment (even if you're getting a great deal) can hurt you, as that is not a liquid asset and will be of no help to you in the event of an emergency (i.e. your factory flooding a major metropolis with 2.3M gallons of molasses). Think of it like a game of Monopoly; if you start building hotels too soon and suddenly need cash, you're stuck selling all your buildings back to the bank for half-price, and you know bankruptcy is right around the corner. Only, in real business, instead of losing yet another game to your annoying brother-in-law, you've lost your entire livelihood.
Expanding your business is the ultimate goal, but maintaining cash flow gives you the solid foundation you need to build upon.
80% of new businesses fail, but that means 20% succeed. To be that 1 out of 5, have a plan, know your value, and remain patient. Better to start small and grow something big than to start too big and dwindle away.
Success Stories: The Client Who Wanted to Quit
We were once approached by someone with a small project. He was just interested in us "prettying up" his financials in preparation of selling his company. He was concerned that his business was not paying him the money he wanted to make, and had just received a new job offer for $60,000.
When pressed about it, he admitted that he wasn't terribly thrilled about this new job opportunity, but felt that he had to take it as, in his perspective, his only income from his current business was a $45,000 draw.
But when The Bookkeeper looked at his financials, we saw:
-
Family's health insurance - $9,600
-
Automotive payment - $9,120
-
Auto, gas, insurance & repairs - $8,450
-
Meals - $10,200
-
Vacations - $7,700
When added to his draw, this amounted to a total monetary benefit $90,070.
This equates to $116,500 in total equivalent taxable income, instead of the $45,000 the client perceived.
When we met back with the client and illustrated to him how much he was actually making, he turned down the job offer, kept his business, and remained his own boss.
The "First-Date Effect": Are you treating new clients like a long-term relationship, or a one-night stand?
Business partnerships, like any other relationship, can be very exciting in the beginning. You meet someone new, and the two of you click. You're on the same page, you have the same vision...You just get one another. Contracts are signed, meetings are arranged and, for a while, the two of you work happily in sync.
Then, something happens. Maybe they're your financial planner, and they stop answering your emails in a timely manner. Or your IT services provider shows up to your office dressed a bit more casually than you're comfortable with. You ask your marketing representative whether you should re-design your logo or leave it as is and they respond with, "Oh, whatever you think is probably fine."
When you first met, you fell in love with their customer service. But now? The thrill is gone, baby.
You don't like being treated like a sure thing, so you know your customers don't either. Here are some ways you can keep the spark alive with your clients so you know they'll stay loyal to your business.
Stay in communication.
Let's say you go out to dinner on a romantic date. You have a nice time, and think the other person did, too. You call them the next day and leave a voicemail thanking them and asking if they'd like to go out again sometime.
Then you wait. And wait. Three days later, you just get a text reading, "sure sounds good".
You probably wouldn't be too impressed. You definitely would feel like they were not as invested in the relationship as you. It's the same way customers feel if you don't respond to communications from them in a timely and appropriate manner. Some general rules:
1.) Respond via an appropriate medium. In other words, unless specifically indicated in the voicemail, don't respond to a phone call with a text or email. If they consider an issue important enough to warrant a phone call, and you shoot back with a casual text or email, it implies that the problem isn't as important to you as it is to them.
2.) Be timely. Don't leave someone hanging, waiting for your response. Many business etiquette guides advise responding within 24 hours to all communications. Faster is even better. If you are trading emails with a client as the two of you collaborate on a project, don't just log off at 5:00 and drop them until the next afternoon. If you have to attend to other business (even if that "business" is really just "having a personal life"), let them know that you have to run for a bit, and then resume communication with them as soon as you can the next morning.
3.) Be professional. This shouldn't have to be said but, sadly, it still does. No matter how friendly your client is, no matter how much you like each other, your communication still has to be professional. Every email doesn't have to include an attached notarized PDF copy in triplicate, but it does need to be free of spelling and grammatical errors. Taking the time to make sure your communications are professional is a sign of respect for your client.
While we are on the subject of professionalism...
Stay attractive.
One of the cliches of romantic comedies is a couple experiencing tension because of complacency in the relationship. At the beginning of the movie, when they fall in love, they go out to five-star restaurants in formal wear. The second act features them eating take-out on the couch in sweats.
When your customer service starts slipping, it is the metaphorical equivalent of you showing up to the client site, wearing sweat pants and eating pizza. (Also, please don't literally show up wearing sweat pants and eating pizza, either.) If you don't provide the same quality of service you did at the beginning, it makes your customer feel taken-for-granted, and like you misled them with false advertising.
Your business should always strive to grow and improve, and your customer service along with that. If you want to really shock your customers, surprise them by providing exceptional service, even above-and-beyond the high level they've come to expect from you.
Stay 
interested.
Nothing makes people like you more than when you make them feel attractive. Just like you try to remember your significant other's birthday or favorite dessert, your clients will be flattered if you can remember the intimate details of their business. You do not want your client to have to remind you of items discussed at prior meetings, or current issues being faced. No matter the size of the company or how much income they bring you, you want each client to feel like they are at the forefront of your mind.
There are small things you can do to make your client feel significant. This could be something as small as tweeting them a relevant news article, or as large as arranging a referral meeting to help them earn new business. By going above-and-beyond the minimum which is required of you, you can help ensure a lasting client relationship to profit you both for the long-term.