Tips On Collecting Accounts Receivable
At the Comfortech 2004 meeting in St. Louis, attendees were given some tips on how a firm credit policy can lead to a strong bottom line. The seminar was presented by Bobby Ring, owner and executive vice president of Meyer & Depew Co., Kennilworth, N.J
. Ring started his presentation by asking contractors why their customers don't pay them. He wrote down the following reasons:
1. Customer does not have money.
2. Customer's money tied up in investments.
3. No clear payment terms.
4. No contract.
He said his company has a clear-cut policy that is outlined in payment terms on each sales agreement, including a 50 percent down payment before work begins. "And no one is authorized to make any different arrangements without talking to me," Ring said.
Terms And Hidden Costs
Ring said that contractors should look at payment terms from their vendors and take advantage of discounts by paying invoices early. He said that vendor payment terms usually contain one or more of the following statements:
The most common of these is two percent/10, net 30, which means if an invoice is paid within 10 days of the invoice date, a two-percent discount will be taken off the total; or, the buyer has 30 days to pay the invoice.
"All terms are usually negotiable," said Ring. "Ask the vendor if he will discount the invoice, and, if so, pay it in 10 days."
He showed an example of how a buyer can achieve an annual percentage rate of 36 percent by paying each invoice 20 days early over a 360-day period. "Where else are you going to earn 36 percent on your money?" Ring joked.
Ring also reminded contractors about another common term in sales contracts: F.O.B (freight on board). He said that he never signs a contract where the terms include "F.O.B. Factory" because the factory shipping the equipment is only liable for the goods while at the factory. He recommends contract terms of "F.O.B. Destination," where the goods are the responsibility of the shipper until they arrive at the contractor's business.
Establishing A Credit Policy
Ring said it is important to create a credit policy for "each type of sale that you make." He noted the difference between service and installation work. Service work is typically C.O.D. unless the customer has a service agreement plan and can be billed. New installations generally require a down payment and payment of balance upon completion of the job.Ring noted that installation-replacement work is where "significant improvements in cash flow can take place" and where contractors can "generate the most positive cash flow."
He said that every installation job requires a down payment of at least one-third and preferably 50 percent. Ring suggested that salespeople politely ask for the down payment and if there is an objection, the customer should be reassured that the request has nothing to do with trusting them - it is a matter of policy and good business.
"Down payments have nothing to do with trust," he said. "It is all about cash flow."
Ring said it is vital to cash flow that customers understand payment terms and abide by them. He said that his technicians are not allowed to leave a job without collecting final payment. If that is a problem, they must speak with the company controller before leaving the customer. He also faxes a final invoice with cover sheet to commercial customers the day before completion of the work, reminding them to have a check for payment in full for the technician.
"You don't want to appear desperate to collect money," Ring said. "That's why you should ask for it matter-of-factly."
He also had a tip when signing contracts with general contractors. "Don't sign any agreements with a general contractor that says you get paid when the customer gets paid. It could be months before you collect the money."
When it comes to asking customers to pay on time, Ring said that contractors should not wait until their cash flow is poor to begin collection efforts. Statements should be sent out on a regular basis without exception.
Ring wrapped up his session by detailing how his company fared by paying invoices early in the last two years. "In 2003, we earned interest on our savings that exceeded the interest we paid on our loans," he said. "We've earned over $10,000 in prompt-payment discounts in 2004."
Not only has the policy made good fiscal sense for Ring's company, he said it has enabled him to strengthen his relationship with key creditors.
Publication date: 10/18/2004
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