This week in Ask The Experts, we look at what happens when a customer goes into receivership with unpaid bills.
Q. My business has been left out of pocket because a long standing customer went into receivership and couldn't pay outstanding bills owed to unsecured creditors. How do I ensure this doesn't happen again?
A. Basically, don't have outstanding bills.
Easier said than done of course, but if you care about your customers' businesses to the point that you are willing to offer payment terms which puts your business at risk, then you need to revisit your priorities. We all want to be a client's best friend, but your first priority should be with your shareholders and staff.
Have clear visibility of your cash flow requirements and understand where the major risks are over the coming two quarters (or whichever timeframe makes sense for your business). Manage them.
Proactive account management and being up to speed with your clients' cash flow and business health is another key role you have to step into. Get to know them well. As uncomfortable as it sounds, if it looks like one of your customers might be getting into a tight spot, and it's clearly not just a blip, you should be more rigorous about getting paid. Not less rigorous.
Put deadlines in place and be clear about communicating them. Don't compound your own exposure by continuing to supply to them if they let you down. If they get the pip and go somewhere else to not pay, are you worried? Build a diversified client base. Multiple revenue streams can cover any short term disturbance in one or another.
Treat discounting payment terms as stringently as you would treat price discounts. You have to get paid before you can bank any profit. Cash flow is the vehicle delivering your margin. We all know once a discount is given it is very hard to get it back. Same goes for letting invoices run overdue. Set your expectations and ask your customers to respect them. Customers who don't pay are asking for charity. If they asked for it up front would you have given it?
It can be tough to get tough, especially with customers, so if it's not your forte find someone who can do it for you. It doesn't have to be debt collectors, it could be someone in your business who delivers the hard line, leaving you or your sales crew to maintain convivial relations.
As rigorous as you are, there will always be another customer who gets in a tight spot. So think creatively about how you can help these customers without putting yourself out. Temporarily suspending things like delivery charges or admin fees which have little or no real impact on you could be a possible accommodation, but be clear on the terms of this.
- Nick Churchouse is venture manager at Creative HQ, www.creativehq.co.nz
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