By RICHARD HART
The scenario is all too familiar.
Jim, a rising sales star at a company we’ll call Leading Technologies Inc., has just closed his biggest deal yet ? a contract to design, build and install computer circuit boards for an up-and-coming commercial alarm systems company we’ll call Safe Security Systems. In the excitement of the big win, Safe’s credit application is tossed in a file and forgotten.
The next six weeks are a flurry of activity to meet Safe’s deadline. A week after delivery, Jim makes a follow-up call. The customer is more than satisfied. Jim makes no mention of payment; he doesn’t want to appear impatient or distrustful.
At 45 days, Jim makes a friendly reminder call. Sorry, the paperwork got tied up in accounting. Payment will be expedited.
Sixty days go by. Jim doesn’t want to strain his relationship by making collection calls. Besides, collections is not his job. So the credit manager calls. This time, the customer admits to a minor cash-flow issue. Nothing to worry about; it will be resolved in a week.
Sixty days stretch into 90. When called again, the customer brings up quality issues he’s never mentioned before. The invoice is just going to have to be adjusted, he says. Only then is it painfully obvious that it’s time to call a collection agency.
Leading Technologies has committed every blunder in the book to practically ensure non-payment. Here are their biggest mistakes ? and how you can avoid them.
? Sloppy credit practices or too-easy credit. Let’s face it: Enterprises are started ? and for the most part, run ? by sales people, not credit people. And we all know sales people who will do anything to close a deal. That may even include extending credit on little more than blind faith.
Oh, they’ll have the prospect fill out a credit application. But amazingly, the so-called credit review process often stops right there. Credit references aren’t even called!
Leading Technologies needs a clearly defined credit policy, complete with step-by-step credit review and collection procedures. These must be hammered out in the cold light of day, free of the emotion-charged environment of a pending major sale. The company should outline precise follow-up procedures, including when to call and even what to say.
? Conflict between sales and credit. Sales people are successful because they get people to say “yes.” Credit people just seem to want to say “no.” That’s the crux of the conflict.
An appeal to the president of the company produces predictable results: Coming from a sales background, he or she inevitably sides with sales ? at least until the company’s been burned a few times.
Leading Technologies needs to make collections part of every sales person’s job. Commissions and bonuses should be tied to actual payments received rather than orders taken. Sales people need training in how to ask for payment directly and courteously (their commission depends on it!) and how to spot trouble early.
Sales and collections can even work together in a “good cop, bad cop” tag team. (“I know you just got the invoice, but those guys in credit are after me to give them an estimated date of payment.”)
? Fear of asking for payment. Money can be an uncomfortable topic, even for a sales professional. So Jim waits too long to bring the subject up.
A clear follow-up procedure ? complete with scripting and target dates for follow-up calls ? is a surprisingly easy solution. Making sure the procedure is actually followed is the bigger challenge. Leading Technologies needs to build in a reporting mechanism to ensure it is followed.
When the invoice goes out, Jim should call promptly to confirm that it was received and ask if there are any questions. He adds simply, “So you don’t foresee any problems meeting the 30-day payment terms in the contract?” Payment is just another business matter and can be openly discussed in a direct, non-threatening manner.
? Allowing oneself to be taken advantage of or lied to. Leading Technologies is letting itself be taken advantage of. Even when Safe has obviously lied, LTI doesn’t call their bluff.
In my experience, companies are slow to pay their bills for three reasons:
1) Human error or sloppy payment procedures, in which case a simple follow-up call makes your invoice a priority.
2) Cash-flow problems, which prompt clients to buy time from you to pay for more critical services that keep them in business from day to day. For these companies, the next priority are suppliers who are the most proactive in requesting payment ? it’s the squeaky wheel syndrome. So be sure to squeak.
3) They are unethical and, frankly, trying to rip you off. These businesses have no intention of paying unless you dramatically cut the invoice or take them to court.
? Waiting too long to call a collection agency. Once Safe’s account became 60 days past due, the chances that Leading Technologies would ever collect on it were 85 percent. At 90 days past due, the likelihood dropped to 73 percent, then to 57 percent at six months.
If Leading Technologies hires a professional collection service, those percentages will increase dramatically ? close to 100 percent in many cases. Without a collection service, the likelihood of payment will just continue to drop off. By nine months, it will be a miserable 42 percent.
That’s reason enough to make collections a top priority ? for everyone.
Richard Hart is principal of Direct Recovery Associates, a debt collection service based in Woodland Hills specializing in collecting delinquent commercial accounts.
Entrepreneur’s Notebook is a regular column contributed by EC2, The Annenberg Incubator Project, a center for multimedia and electronic communications at the University of Southern California. Contact Dan Rabinovitch at (213) 743-2344 with feedback and topic suggestions.
