By Leonard Green and John Altman
The lesson here is that by emphasizing your need as a privately held company for strict adherence to the terms of sale, you will find that many customers will help you out, even at the expense of paying big companies late.
Use collections to motivate your sales force. In order to consistently receive your money on time, you must also integrate the collection of receivables into your methodology for compensating your sales force. In other words, you must delegate responsibility for timely receipt to your sales personnel as a condition of sale.
At the companies John headed, the remuneration package for the sales department included performance awards for prompt payment of invoices. By building a team relationship between your credit and sales departments at the onset, you also will be surprised about how much you can learn about a customer before you assign a line of credit. No one is closer to your customer than the field sales representative.
The lesson here is that good sales people quickly pick up the importance of cash management, especially when their compensation is tied to it. Sales people who use credit as a sales tool are quickly self-disciplined by bonus penalties.
Negotiate better terms with suppliers. With the basics of collecting in order -- that your customers and sales personnel understand and adhere to your requirements -- turn next to the third leg of the receivable stool: your suppliers. The lesson is that there is always room for negotiating better terms. At the most basic level, of course, you should never pay an invoice promptly unless a meaningful discount applies. Instead, wait the full period before writing that check.
In addition, negotiate with your suppliers for longer credit terms and/or increased credit limits, both of which can create free finances to help fund future sales.
Manage the time aspect of collecting. The final lesson is a proverbial one: In collections, as in so many business transactions, time is money. You need to incorporate that philosophy into the DNA of your company. Develop a sense of urgency about all aspects of your business!
Therefore, invoice in a timely manner, specifically the same day your product or service is shipped or delivered. Your customers can readily, and fairly, use the excuse that they are a week or two late in paying if you have invoiced a week or two late! Build in techniques that could help speed payments your way. For example, you should consider offering customers a discount if they pay prior to the due date -- or charging a penalty if they are late. Admittedly, it is difficult to collect late charges. Also consider accepting credit cards and debit cards as payment options.
Once receivables begin to age, be proactive about collecting. A system establishing, reviewing, and monitoring credit limits for each customer must be in order, as well as a means for establishing and dealing with aging reports. In an age of technology, a daily aging report is essential and inexpensive.
The lessons we have learned about collecting, as both professors and entrepreneurs, have served us well in our businesses and saved very substantial amounts of interest on funds that did not need to be borrowed. The money is yours, after all. Make sure you collect it in a timely manner.
John W. Altman joined the Ewing Marion Kauffman Foundation as a Vice President in June 2000, leading a team seeking to advance the Foundation's mission of accelerating entrepreneurship by identifying new opportunities and determining how to maximize current programs. In 1998, Altman became the first Robert E. Weissman Professor of Entrepreneurial Practice at Babson College.
Leonard C. Green is the founder and CEO of four family businesses. These include The Green Group, a New Jersey C.P.A. and entrepreneurial consulting firm; Jobel Management Corporation, a multistate real estate company; DJ Stable, a thoroughbred racing and breeding operation; and Entrepreneurial Strategies Group, a family business consulting firm. Green is an adjunct professor of family business and entrepreneurship at Babson College.
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