The client’s business is growing at a double-digit rate. The business model indicates a gross profit margin in excess of 50 percent. Fixed costs are in line with projects. Monthly profit and loss statements show a substantial profit; however, the bank account is constantly overdrawn and the owner is frustrated. He has had to inject cash from his personal savings to meet payroll and expenses.
The client uses Quick Books for his or her accounting software. Several observations are made upon review of the Profit and Loss statements within the past several months. First, the client is only looking at the statements on the accrual basis. Running the same reports on a cash basis shows a very different picture—the same months showing profit are now showing profit loss. The gross revenues fall while most of the expenses remain the same. I ask him to run several balance sheets and the problem becomes clear. Accounts receivables are averaging 60 days. I have the owner run an A/R aging report and the problem becomes even clearer. Several sufficient customers are taking 45-75 days to pay and this is well over the 30-day payment term.
The clients whose payments are delinquent are contacted for payment. Most likely, they are taking advantage of the company’s good nature by not asking for payment. The squeaky wheel gets the oil, and my client was not squeaking loud enough if at all. All of the customers are contacted either by a visit, phone call, a letter, or an e-mail. All new shipments stop pending payment. It is amazing how quickly payments are made when shipments and services are withheld.
A Lesson Learned:
Most companies are reluctant to discuss late payments with their customers. It is viewed as controversial and can hurt the business-client relationship. If payments are not monitored and immediately acted upon, your business will become a bank for your customers and this is not part of your business model. Suppliers have very few rights, but being paid to terms for products or services provided is one right you should never cede to your customers.