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Complete - Practical - Proven
How to Have Credit Customers Pay
On Time — All the Time
Be paid on time MasterClass
CAVENDISH
Kings Court, School Road, Hall Green, Birmingham B28 8JG UK
Telephone: + 44 (0) 121 244 1802
Fax: + 44 (0) 121 733 2902
Email: info@cavendish-mr.org
www.cavendish-mr.org
CAVENDISH
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Achieving Business and Personal Excellence
By
Dr. COLIN THOMPSON
`A WINNING ATTITUDE LEADS TO SUCCESS`
(Every one should have one!)
Winners are people that strive to be all they can be, and will go to great lengths to
reach there potential. An internal burning desire drives them to be successful. They
possess a positive attitude and can focus their energy. They become stimulated by
the challenge of creating the future they want and then act to complete the task.
Creating a winning attitude comes from first setting clear, concise and attainable
goals. The objective of goal setting is to provide a clear sense of direction and to
properly plan and organise events and performance.
The next step is to establish a positive self-image. We can attain this through a
personal vision of successful future accomplishments, acting confident and being
proactive. Other steps include monitoring your performance against your targets,
(every job has its own Profit and Loss record) as this would motivate you to give an
extra effort if you are falling short of measured goals.
Finally, reminding yourself of your victories will reinforce a positive attitude and
maintain a winning state of mind. When results do not materialise as planned, a
winning attitude helps to look towards the next time and next opportunity. Attitude is
the difference between a non-win and a failure. A person only fails when he or she
quits. Trying again means that he or she has learned one way in which they cannot
achieve the goals. But striving to be successful takes attitude! Be passionate for
success and your disciples will make it happen!
Remember, a successful and positive person is a person who is available to help
others succeed in a world of endless opportunities that extend across many business
sectors, from strategy through to implementation. Accelerate your impact on your
business and personal growth with the `right` attitude to be successful.
Business and general life is about dialogue that we `all` understand and respond to.
So make the playing field equal, so all people understand the language used and the
action to take, to receive and accept, so business life and general life is successful
for `all` involved.
Yes, you can achieve all things in life by your attitude to be positive, you have the
solution in you, so go forward and use it now and be successful in your business and
personal growth.
"Morale and attitude are the fundamental ingredients to success."
-- Bud Wilkinson
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Copyright
“Be Paid on Time” was published electronically in April 2003.
ISBN 0-9532679-1-1
The information contained in “Be Paid on Time” may not be used
as a basis for seminars, workshops or training events conducted
for gain, hire or reward, without the written permission of the
our organisation - Cavendish.
It may be used without restriction for internal management
purposes within any company that has purchased an original
copy from an authorised source.
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Author’s Profile
With a lifetime experience of involvement in a wide variety of smaller,
private sector businesses, Ted Rose (b. 1936) became Chairman of an
accredited domestic electrical test laboratory, Rowland Laboratories Ltd.,
in 1987. In 1993 he also took over as Managing Director. In January 1998
he sold the business to a multinational company whose President
described it as “The best laboratory in Britain.”
In the course of this sale, persistent questioning by the purchaser’s
accountants made him aware that the company’s debtor control had been
unusually efficient. The business had virtually no overdue debtors.
Advance publicity surrounding the government’s manifesto and white
paper in respect of what has now become the Late Payment of
Commercial Debts (Interest) Act 1998, coupled with the launch of the
Better Payments Practice Group (BPPG), drew the author’s attention to
three facts:-
First, late payment of invoices was a major problem for many businesses,
especially SMEs.
Second, he had evidently developed methodology capable of eliminating
the problem.
Third, attitudes to debtors and the procedures commonly advocated were
fundamentally flawed. Any business following conventional advice must
inevitably run into problems with late payments.
Further research revealed, extraordinarily, that virtually all advice on the
subject concentrated upon procedures for obtaining payment, only after it
has become overdue. Whereas, quite obviously, truly correct debtor
management must create an environment in which every customer
expects and is willing to pay on time. Anything else is failure, not
management.
Having retired from mainstream, executive management, the author is
infuriated by the sloppy thinking that creates a failure to manage debtors
in a positive manner and which therefore flies directly in the face of
excellence in customer relationship management (CRM).
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We promise that this system will enable managers of small or
medium enterprises to make their debtor management a positive
tool towards growth and prosperity.
The difference between what you will learn in “Be Paid on Time” and what
you have seen elsewhere is quite simple. Most advice about credit control
is created by academics or credit managers and directed at professional
credit managers. Accountants, bankers and credit managers in large
organisations treat the subject as a numbers game.
The reality for those of us running our own businesses is quite different.
Debtors are our customers. Our customers are to be cherished because
they pay our salaries. The care and nurturing of customers, and therefore
of debtors, is a job for sales people, not for accountants.
We know that it is more effective to concentrate on retaining delighted
customers, meeting their repeat orders, or selling them a wider variety of
new products or services than it is to ignore them while looking for new
customers. Indeed, gaining new customers while simultaneously losing
existing ones does not constitute development at all. The latest re-
packaging of this nurturing concept is Customer Relationship
Management, CRM, but with particular reference to the use of electronic
systems in order to do so.
It requires very little thought about CRM philosophy before it becomes
obvious that traditional, conventional methods of credit control,
historically looked upon as a function of the accounts department, are
negative and confrontational. Such antagonism is in complete contrast to
the rest of a company’s CRM based attitude to its customers. This
therefore has to pose a significant barrier to the success of the company’s
overall marketing efforts.
No company seriously intent on cultivating positive relationships with its
customers, as an essential ingredient of its marketing methodology, can
afford to have a significant customer interface malfunctioning in this way.
The simple message behind “be paid on time” is that the entire
framework for providing credit and collecting payment has to
make a positive contribution to the company’s image, growth and
profitability. Not only is this perfectly possible: it is much easier to
manage than any alternative.
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Follow up
Don’t waste it!
Once you have read through this documentation of the workshop, you will
wish to ensure that the ideas are fully implemented in your own company:
we want to make sure it works for you.
There will always be discounted arrangements for those who have
purchased the documentation first, but then decide to attend a
workshop.
We will always pay you or send you a gift in exchange for
referrals: just let us know the name of the person you have
advised.
Workshops will normally be restricted to twelve delegates in order to
ensure maximum individual attention and value. As an alternative, apart
from running workshops, we are available simply to help you win hearts
and minds: outside consultants can sometimes assist in overcoming the
barriers of hierarchy, age, or office politics.
If you would like us to facilitate some in-house training, or simply advise
on certain aspects of debtor management, please let us know. Having
attended a seminar you will automatically be e-mailed updates, tips and
latest thinking, unless you ask not to.
The benefits to staff morale, mutual respect and job satisfaction will be
significant. It remains important, if the company is to gain full advantage
of this, to ensure that each member of staff is aware of the personal
benefit to him-, or her-self.
Move on: in conjunction with Investors in People and the concept of
lifetime learning, we have developed The Training Matrix ™, which
transfers ownership of training achievements from forgotten management
files to individual staff members.
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Module One
You will learn:
The fundamental importance of having a defined Unique Selling
Proposition, USP, in order to set up constructive debtor management.
The underlying benefits of having a written credit policy.
YOU HAVE THE POWER TO CONTROL YOUR WORLD
The reason for late payment of invoices (and eventually of bad debts) will
invariably have gone back, not just to the time the order was taken, but
probably to the day the business was founded. That is why it is so
fundamentally important to start from a position of strength, creating a
positive attitude to customer relationships from the very outset.
That strength stems from objective self-knowledge: why you are in your
particular business, what are the core essentials of your offer and how you
relate to the competition. This is nothing to do with accountancy:
everything to do with marketing. There are plenty of perfectly valid
reasons for setting up a business, but the single, universally vital thing is
that people should pay you for your product or service.
My proposition is that the entire subject of Credit Control, the
provision of Trade Credit, or Debtor Management, is a function of
marketing. Every aspect must be managed so as to make a positive
contribution to marketing. Your credit control system must not be allowed
to be a barrier to trade.
Your U.S.P.: what is it you provide? What is different? What is special
about it or the way you supply it? Why should anyone buy what you offer?
Why should they buy from you and not from someone else?
Look for ways in which you might accentuate that difference. If it is a
technical edge, what benefit does that provide for your customers? Can
you deliver in such a way as to increase those benefits, make them more
apparent?
If it is a service, what is normal in your chosen market? How can you
provide it in an innovative way? Examine all the little parts of your offer to
make them special.
Be honest with yourself about why you think your business has
a future. Be ruthless with your personal plans if you think it may not have.
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Once you have made it your habit to look at your projected business in
this way, you should begin to realise that the payment terms are not
something separate to be left to accounts clerks, but an important
element of your entire relationship with every one of your customers.
When you are confident about what you offer (as opposed to what other
companies offer) you have no reason to be frightened to charge for it. This
is why you must know the components of your Unique Selling Proposition.
Therefore:
IF YOU CAN’T IDENTIFY YOUR U.S.P., DON’T GO INTO BUSINESS.
One tends to assume that your USP has to be some amazing technological
advance. It is much more likely to be a combination of mundane things:
You open late or early or at weekends to suit customers who
might be commuting. You man the telephones to answer calls
from the USA or Japan at their peak times.
You deliver or collect more frequently or reliably, or in small
quantities.
You manufacture short runs, keep special purpose stocks.
Your lead times are shorter, or response time quicker.
You speak the language.
You’re friendlier, more helpful, or more often available.
Your quality – fitness for your customer’s purpose – is better.
You compete with very large companies that simply don’t look
after the needs of their small, but your big, customer.
Case Studies:-
It might be that your customer wants his paper delivered before
7.30, when he leaves for the station and the other local
newsagent can’t oblige.
A car service customer can leave his car at the garage for repair
first thing in the morning, but it must be delivered back to his
home by 6.00. He expects it clean inside and out. The garage he
had been using made him mad because they left him to dispose
of the plastic sheets they had used to protect the car seats. Your
repair service gets rid of them for him — and washes the car.
Another business wants small quantities, only “250 size A”
delivered before 9.00 on Mondays and “275 size B” on Tuesday
evenings.
The packing for an export order involves a different size of pallet,
special strapping and the paperwork exactly correct to avoid a
hold-up on the Hungarian border. Get that absolutely right and it
is worth more to the customer than the value of the original
order.
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You have someone answering the phone, in person, with a really
cheerful, helpful attitude to each customer’s individual request ―
as opposed to one of those dreadful, automated systems.
There are lots of grand names and detailed techniques covering much of
this process: Strategic Planning, SWOT analysis, and so on. SWOT stands
for Strengths, Weaknesses, Opportunities and Threats.
The trouble is that my view of a threat could be your golden opportunity!
Case Study:-
One shoe salesman in darkest Africa sees no call for his product
as nobody wears shoes. The next asks his boss for immediate
sanction to open a permanent branch in order to service the
biggest market he has ever seen.
The greatest danger, strangely enough, lies with those businesses
where the founder has a particular technical skill, or a personal interest, or
an invention. They tend to be completely introspective, with no real
understanding of who might want to buy from them, or why. Successful
businesses require a mix of skills (which have an unfortunate habit of
changing as the operation grows!) so it is well worth taking advice at the
outset. Many of the re-vamped Business Links/Small Business Service
centres now provide just such an intelligent service.
The processes involved in finding out about customers’ needs can be quite
involved and complex, and at the same time paradoxically simple. Most of
us have a perfectly natural reticence about asking naïve questions
because we think we will appear stupid. In fact, of course, the opposite is
true. The real problem is that buyers tend to be short of time, so it is
essential to gather information in a clearly helpful manner. Helpful to the
customer, that is.
Really good salesmen learn to listen to the need behind the words. The
customer does not always know the most effective route to satisfying
those needs, or solving his problem. This is especially true in the fast
changing electronic world of computer systems and information
technology: I speak from personal experience! But let me give a couple of
much more mundane examples.
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Case Study:-
A man goes into your D.I.Y. store to buy a drill, rawlplugs and
screws. What does he actually want? He has bought his wife a
wonderful new painting and wants to hang it on the wall of their
living room. He doesn’t really want a drill. If you told him about
those new toughened little three-pin systems and sold him one of
those instead, although that particular sale would be much less,
you would gain a customer for life (as well as the people he tells
about you) no matter that the local superstore with its bored
checkout girls might offer cheaper prices.
Case Study:-
One of my managers, a brilliant technical boffin, assured me that
he knew all about his customers. Among them was an importer of
decorative lighting from whom we failed to win repeat business.
The reason? He was actually an exporter of light bulbs and his
only import had been a one-off, quid pro quo shipment, as a
favour to one of his own customers. Because we had made
assumptions, we hadn’t even offered him our technical assistance
for exporting to Singapore, which would have been of genuine
help to him.
Ask questions.
This is one reason why being made redundant is so often a surprisingly
good springboard for founding a business. The founder will more than
likely have a very sound idea of the market, costs and prices, demand for
short runs, speedy response, or genuine customer care within the industry
he has just forcibly left — all of which can prove to be vital ingredients
that fall from the negligent claw of a large company.
These are precisely the sort of aspects that may have a significant value in
the opinion of your customers. Your job is to listen to the balance of what
is really helpful, really important to them. Translate that into your own
USP and it becomes relatively easy to ensure that they recognise that
value and are prepared to pay for it and pay on time ― all the time.
This creates the first vital step to enable you, not just to plan your own
future, but to create your future on your own terms and be in a position to
reap the benefits, year after year. You will have the confidence to be in
control of your customer relationships and the credit facility you provide.
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Confirmation of this comes in the form of research from Bradford
University which has shown that companies employing good credit
management practice, regardless of their size, consistently outperform
those without.
The sequence therefore has to be:
o Decide what business you are in, what your market is and what
features make your offering so special.
o Decide on your Terms of Trade.
o As part of your Terms of Trade, you will have to define your
credit policy. [See Module Four.]
o Develop the confidence to include your terms of trade with
every quotation to every customer.
o Understand that your professional image will be enhanced by
your having with you a Credit Facility Form to be filled in by the
customer at the order stage.
o For every customer you will have to make a conscious decision
whether or not to provide credit.
We will come to examine the above documents in detail and also the
practical processes involved in order to decide on the provision of credit.
Recap: The Core Message for Module One
The management control of debtors is a matter of confidence.
Understanding of your USP will provide this.
Exercises for Module One
1. Define USP.
2. Explain your company’s USP.
3. Suggest ways in which it might be reinforced.
4. Name three benefits of having a written credit policy.
5. Why does redundancy often present an excellent opportunity for setting
up a business?
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Your Notes and Answers to Exercises
1.
2.
3.
4.
5.
Module Two
You will learn:
How to draw up Terms of Trade that actively support your business.
How and when to advise your customers of your Terms of Trade.
Why the assumptions behind the Late Payment of Commercial Debts Act
1998 are wrong.
The correct way to charge interest.
TERMS OF TRADE
You will undoubtedly have come across many instances where terms have
been written in tiny grey print on the back of invoices. Aren’t they awful?
Don’t you, like me, immediately wonder what on earth they are trying to
hide? What sort of basis for any future relationship do they imply? They
are indeed completely wrong on a number of counts.
First, terms have to be agreed between buyer and seller, at the
time the order is placed and accepted: the stage known as contract
review. They are part — and from the point of view of being paid on time,
an extremely important part — of the agreement. What the customer
wants, how the product or service is to be supplied, and when it is to be
paid for.
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It is therefore obvious that to introduce terms of trade only when the
invoice is raised is pointless. At that stage in the proceedings they can
have no bearing on the original agreement. The invoice is not part of the
contract. It is simply part of the delivery mechanism. That does not, of
course, gainsay including a reminder of what had been agreed, on or
with an invoice.
Secondly, there is absolutely no point in having Terms, which have after
all been designed to govern an agreement, presented in such a form that
at least one of the parties cannot read them. If it comes to the crunch and
a deal goes sour, ending up in court, there must be a very strong
argument that they had been deliberately created in that way, with an
intention to mislead.
The same argument could hold in respect of both the number of clauses
and the manner in which they are laid out. Fifteen, twenty, thirty
clauses, with the really important ones hidden away in the middle
somewhere: have you ever been defeated by boredom, trying to find the
important bits amongst all the jargon? Exactly.
All of this creates an impression of a devious company with something to
hide. If you are intent on being paid on time, all the time, you have to set
your stall out in such a way as to be perfectly clear and straightforward.
Remember, the creation of misunderstandings and fudging of
issues presents any would-be slow payers with all the classic
ingredients for successful delaying tactics.
Finally, all those clauses! Lawyers, who used to be paid by the clause, still
love making a meal of standard terms, but from most practical points of
view they should be presented on one separate sheet and kept as simple
as possible. In view of the verbosity of much accepted practice, it is
extraordinary just how simple, “simple” can be.
1. Goods remain the property of the seller until paid for in full.
2. Signed order signifies acceptance of terms. [See Module Seven.]
3. Standard terms are for payment on delivery. Where credit terms
have been agreed, payment is due by 20th of month following
date of invoice. [See Module Six.]
4. Right to charge interest on overdue accounts.
5. If part of customer’s account is overdue, whole of account
becomes immediately payable on demand.
6. Complaints should be in writing and raised within (say) seven
working days of delivery, i.e. promptly in relation to your type of
business.
If you export, you will need to say that the contract is governed by English
law and subject to the jurisdiction of the English courts.
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If you deal in intellectual property, software and so on, you will need to
take very careful steps to ensure that large companies do not steal your
ideas. They often will if they can. In those circumstances you will need
some specific legal advice.
The object of these clauses is fairly self-evident.
Clause one allows you to reclaim the goods, not only from the customer,
but also from a liquidator. (One of our objectives is to try to reduce the
likelihood of this eventuality to nil, but nothing in life is guaranteed.)
Clauses two and three we shall examine in detail later.
Clause four is important because it is widely misunderstood. Indeed, the
disastrously wrong message is now enshrined in The Late Payment
of Commercial Debts Act.
The correct clause should simply state that the seller has the right to
charge interest.
It is completely wrong to add any more than that. The reason for this is
that we, as sellers, do not in the least wish to have any late payments in
the first place. The relationship we wish to cultivate with our customers is
one where we never have reason to consider charging interest.
Once this clause contains any mention of interest rates, even though
those are supposed to be penal, the customer will compare the cost of
borrowing from us with what he is being charged elsewhere. As an
interesting exercise, ask your own bankers what they would charge for a
completely unsecured loan, over and above your agreed overdraft limit. In
relation to their answer, the statutory rate of eight per cent over base will
suddenly appear distinctly less penal, I promise you.
Put this in context: banks are in business to lend money. That is what
they want to do.
We, on the other hand, are desperately trying to avoid doing any such
thing, and yet, if we quote interest rates, our message to our
customers will become precisely the same as that of the banks.
Absolute madness! Don’t they think at all, these politicians?
Clause five is simply to prevent a customer fooling around, paying in
dribs and drabs, but always owing substantial overdue sums.
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Clause six prevents the common wheeze of not paying an invoice and
raising the query about it only after it is well overdue, so gaining further
time while the complaint, if it exists at all, is being sorted out.
Recap: Core Message for Module Two.
Your Terms of Trade must be clear, simple and legible and presented up
front. They govern your subsequent relationship with your customer.
Exercises for Module Two
1. Give two reasons why barely legible terms are likely to be detrimental
to your business.
2. How many standard clauses are necessary for normal trade purposes?
3. List five ways in which terms of trade should actively help your
business.
4. Why should your terms never state an interest rate for overdue debts?
Your Notes and Answers to Exercises
1.
2.
3.
4.
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Module Three
You will learn:
How to choose your customers: why only the best will do.
Long term market strategy: the best of both worlds.
Why you must vet all your customers.
THE MARKET AND CUSTOMERS: CREDIT POLICY
The Cake and the Double Whammy
You first have to have some method of deciding which customers you are
prepared to offer credit to and indeed, why.
Look at the reasons why, first.
Obviously it makes sense to avoid providing any credit facilities to any
customers at all, if that is feasible, unless that provision creates some
tangible benefit in return. There are plenty of trades where it is quite
normal for payment to be in advance, or on delivery, or at least partly in
advance. Do not give away any of that built-in advantage without a clear
understanding and measure of the corresponding benefit to yourself.
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Case Study:-
Restaurants normally exact payment before a customer leaves.
Yet many will willingly provide credit account facilities, if asked
by regular customers. Would that customer go elsewhere if the
request were to be, politely, refused? Probably not, if he thought
the quality of the food and the prices represented good value for
money. Businessmen, entertaining their customers use the
argument that they dislike flaunting cash and there are problems
with the revenue over benefits. The answer for the restaurant is
to take credit cards. They have a cost, certainly, but provide
security in return. The brutal truth in those circumstances is that
credit account customers expect to pay later than the stated
terms. That involves, not only the cost of interest on the money
and the real risk of picking up a bad debt, but also the extra
work of sending out invoices — all for an extremely doubtful
extra return. Much cheaper to provide the customer with the
kudos he seeks of being regarded as a “regular” by remembering
to address him by name and adding the nicety of: “Your usual
table, Mr. Jones”.
Many trades involve the supply of a mixture of materials and
labour, or of development or design costs, or some element that
has to be contracted out. It is not the least uncommon to ask for
pre-payment to cover that outlay, in advance (even when you
yourself don’t actually have to pay the sub-contractor up front).
It is extremely important not to overlook the opportunity.
In any business where the quality of workmanship will be judged
at the end of the job, the customer will expect, quite sensibly, an
element of retention until he is satisfied. The quid pro quo is to
ask for stage payments. There is considerable scope to load
those in the supplier’s favour.
The whole point of these few simple examples is to emphasise that it is
often surprisingly easy, given a little thought and ingenuity, to avoid
providing credit, even in business sectors where trading on credit is looked
upon as the norm.
If it is possible to avoid selling on credit, do so. If it is possible to reduce
the proportion of credit within a sale, do that.
Also, see if it is possible to cement payment more securely into place by
the use of Standing Orders or Direct Debits. Could you do that for at least
part of the payment and then issue a “topping up” invoice for the balance?
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Note: Always give a reason and, if possible, find a balancing
benefit to provide for the customer in return for asking for earlier
payment.
Case Study:-
I was standing in the usual slow moving queue at the Post
Office. A distraught looking, foreign lady rushed in and began
trying to barge her way to the front. Everyone‘s response was
predictably stroppy. She then stammered tearfully in broken
English that her baby was very ill. She had tried to call an
ambulance ages ago, but nobody came. Now she urgently
needed to draw some money to pay for a taxi to get her baby to
hospital as it seemed much worse. Three of the men nearest
her in the queue immediately offered her a fiver.
In looking for a benefit, try to find something that in effect costs you
nothing. For example, when you buy a copy of this training manual, you
will automatically qualify to obtain our Training and Skills Matrix™ at half
price. After the initial set-up and print run have been covered, the physical
cost of each extra copy is negligible. The (considerable!) value is in the
intellectual property.
So much for why you should, or should not, provide any credit facilities in
the first place.
Now consider, which of your own customers you would choose to supply
on credit if you were forced to do so? How should you set about sorting
the sheep from the goats?
The greatest mistake, common to nearly all smaller companies, lies in
having totally the wrong attitude to this proposition. When a potential
customer wishes to place an order and assumes that payment on account
will be acceptable, most salesmen naturally want to say, “Yes”.
That sounds normal and logical: we are in business to make sales, after
all, aren’t we?
Only provided the sale is paid for. Not otherwise: remember my friend in
the introductory environment. A sale is not a sale until you have the
cash.
A more constructive attitude, in the long run, is to think of one’s market
as a cake.
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Think of your market as a cake.
More conventionally, draw a pie chart of what you consider to be your
proportion of your market. Your segment, even if you were a substantial
company, would be extremely slim. As a small company it will be tiny. If,
for example, you estimate that you have eight per cent of your market, on
a clock face that is slightly less than the segment between one o’clock and
two: a tiny slice rather than a hefty chunk of my cake.
Now there are good customers and rotten ones in every marketplace.
There are those who pay on time, who understand the value of what you
supply, and those that don’t. There are some companies, which
deliberately set out to delay settlement and procrastinate in order to hang
on to their cash for as long as possible. If you were able to choose the sort
of customers you would prefer, which would they be?
The answer is pretty obvious. And I have good news for you: you can
choose.
In terms of your market as a cake, your slice may not be very thick, but
you may choose a slice with the thickest icing and a candle and
Happy Birthday written on it.
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A slice with thick icing and a
candle.
However, that freedom of choice involves acceptance of the contrary
discipline that you have to learn to say, “No,” to second helpings, or it will
all end in tears. Nothing has changed since you were a child. Being too
greedy will still make you sick. Galling as it may be to have to admit it,
Mummy was right.
Back to business: just consider the realities of this approach a moment
longer. Suppose you have only customers who are lovely to deal with and
always pay on time. What happens to all those others that, frankly, had
you known about them, you wouldn’t want under any circumstances?
That’s right; they have to go to your competitors. Do you think that
will that help those competitors? No, not on your Nellie, it won’t!
Lo! And behold, you are creating a double whammy situation. You win
twice over.
I promise you, it works. Not long ago I deliberately gave away my two
biggest customers in one of my businesses.
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Case Study:-
The first was a big plc. The buyer always looked simply for the
lowest possible price. They had, naturally, had a significant
quantity discount, but eventually our continuing to meet their
price demands would have meant that we were doing no more
than covering our wage bill in order to work for them.
I made sales and production managers check the arithmetic
carefully (several times!) with our accounts department. Then
with some trepidation, we declined to meet the prices they
demanded, so they took their business elsewhere. What they
discovered, of course, was that they could get the job done at
the price, but not the service that went with it. They had
previously placed no value on our willingness to meet their
deadlines and their frequent, last minute, rushed orders.
In due course they were forced to come back to us with those of
their jobs that were either more technically difficult, or most
urgent. They now paid us the full price for these. The effect was
that we now made a good profit working for them, but needed
only 25% of our previous turnover to do so.
Case Study:-
The second company was simply dishonest. They made an art
form of losing documents or querying invoices. Not all of them,
but enough so that they always had an excuse for not paying on
time. Our staff spent their time searching through past files and
correspondence to settle their queries or replace missing
documents.
In addition, their cheques had to be signed by two Directors, one
of whom, conveniently for them, spent much of his life abroad
buying product. They were very polished and subtle about not
paying: “You wouldn’t expect us to pay when the documentation
doesn’t seem to tie up with your invoice, would you?”
I was eventually forced to put my cards on the table: “We don’t
ever have similar trouble with any of our other customers. I’m
afraid I’m going to have to put the price up to cover the extra
secretarial work involved on your behalf, and we will be unable
to accept any future orders until your account is fully up-to-
date.”
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I did not accuse them of lying. I did have to choose a
moment when they didn’t owe us too much money: and they
predictably enough took several weeks to settle the small
amount they did owe us at the time.
The double pay-off in this case surfaced when we heard in due
course that their paper chase escapades were throttling our
competitor to whom they had turned. How did we discover this?
Because our competitor’s service had deteriorated to such an
extent that several of their other customers now came to us
instead.
At first sight this might seem to take courage. True: it does, or it did at
the time. In fact it should simply be a matter of common sense. There is
absolutely no benefit in working for a customer on terms that do not make
a satisfactory contribution to your profits. Not only that: late payment
leads inevitably to a greater risk of becoming a bad debt. A bad debt is the
ultimate no, no: you never get paid.
So, once you have digested the concept that you can, indeed you must,
select your customers. Module Four describes the practical selection
process.
Recap: Core Message for Module Three
Never be afraid of turning away rotten customers. They will repay you by
disrupting your competitors’ businesses.
Exercises for Module Three
1. List six benefits of not trading with a poor customer.
2. Draw a watch face pie chart and enter your company’s
market share.
Your Notes and Answers to Exercises
1.
2.
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Module Four
You will learn:
Four reasons why you should check all credit customers.
What essential information you must have about each customer.
The practical way to analyse status reports, simply and effectively.
Two over-riding reasons why you should not ask banks for status
information.
VETTING AND ANALYSING CUSTOMERS
First, you must have factual information about all your new customers,
before you provide them with credit facilities. Fortunately, technology has
moved strongly in your favour to make this easy. Do not be misled by any
companies you come across that have failed to move with the times. Do
not waste time asking for trade references, unless there is no other way to
obtain information, e.g. maybe, in the case of sole traders. Similarly, do
not waste time asking a bank to provide references.
Credit reference companies now provide a service that is so cheap and
fast that any company can well afford to check the status of every new
customer, except when your product range dictates insignificant sales
levels to a high number of customers. Even then it is well worth knowing
about a new customer, however tiny the first order: who is to say that
order will not have come from a relatively substantial company, towards
which you would certainly wish to direct further marketing effort, or a
company deliberately trawling to monitor your quality of response?
Speed of information is essential. You cannot afford to keep a new
customer waiting while you come to a decision. Fax and e-mail services
provide same day reports as routine. Nothing less will do: you owe that
level of support to your sales staff.
The other two factors that will feature in your choice of credit status
information are price and a more detailed back-up service. Reference
companies, naturally, tend to try to sell you greater detail, as routine,
than you really need. Negotiate a better price for two information sheets
only. Sometimes you will need more comprehensive detail, but again it
should be at a reasonable price and speed.
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As an aside, the reason I am so positive that information from clearing
banks is not worth the paper it is written on is that I once asked our bank
(I have since moved!) about a company that I knew to be bankrupt. They
said it was properly constituted and that the directors wouldn’t commit
themselves to anything they couldn’t support. Utter drivel: the banks are
the last to know about their customers’ difficulties.
Happily for us, competition between credit reference companies is
extremely fierce, mostly fuelled by developments in the application of
electronic technology. Financial information about your customers, as well
as changes to their situation, can be in your hands within seconds of it
being in the public domain. Do select reports supplying automatic
updates and including creditor days against that industry average.
You need to be aware that the way in which reports are presented varies
from company to company. It will be worth your while taking the trouble
to find one that best suits your particular trade and circumstances. Follow
the links on the bepaidontime website: we are regularly in contact with
credit reference companies and try to point you in the direction of those
that seem to offer a combination of value for money with the most
efficient, practical packages for SMEs. Also, as a customer of ours, we will
e-mail you from time to time with significant updates.
Although company reports can be as detailed as you want them and a
technical risk assessment may be provided, you still have to learn to
analyse the information for yourself. (It is the same as when using an
electronic calculator: even though it does all the work for you, you have to
have some idea in your own mind if its answer makes sense.) It is your
money at risk, remember, not theirs, so you are perfectly entitled, and
might be entirely correct, in taking a different view. Also, a company’s
financial status can change frighteningly quickly, so recent trade rumours,
or your own grass roots information, might legitimately and correctly
colour your opinion. I dare say you and I would have happily set up credit
arrangements for Marconi in January 2002, but perhaps not so cheerfully
six months later.
The information provided should enable you to see:-
a) That the customer has the cash available to pay your invoices.
Don’t forget that the credit needed for each customer will be
twice the amount of expected monthly sales.
b) Trends: if their situation seems more likely to improve in
future or to get worse;
c) Your own degree of risk / supervision likely to be required.
d) The names of the directors.
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Credit reference agency reports are based on accounts filed by law at
Companies House. You can in fact obtain them free of charge if you have
all the details correct. But occasions might arise when you wish to obtain
them yourself, or you may have one of your customers give you theirs. So
we should just spend a few moments looking at the salient features of a
balance sheet and P&L account.
Example of a simple company balance sheet
2002 2001
Fixed Assets
Leasehold property 245,000 265,000
Investment in subsidiary co 63,000 63,000
308,000 328,000
Current Assets
Stock 82,000 93,000
Trade debtors 42,000 37,000
Prepayments 13,000 12,000
137,000 142,000
Current Liabilities
Trade Creditors 51,000 63,000
Accruals 2,000 2,000
Amounts due within one year 38,000 51,000
91,000 116,000
Net Current Assets 46,000 26,000
Total Assets less Current Liabilities 354,000 364,000
Represented by:
Capital and Reserves
Bank Loan 180,000 200,000
Called up share capital 50,000 50,000
Directors’ Loans 47,000 47,000
Profit & loss account 77,000 67,000
Shareholders’ Funds 354,000 364,000
There are various ratios derived from the figures, which the professionals
use as standards to help answer these questions. You do not need to be a
qualified accountant to understand, or use them, whatever the boffins
would have you believe. Logically, the focus is on your customer’s
available cash with which to pay your invoices, so what do we need to look
at most importantly?
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Clearly, we wish to see that the business is both solvent and profitable.
However, that is not much comfort if the company would have to sell its
factory to pay us. So look at Current Assets against Current Liabilities.
If current liabilities, CL, exceed current assets, CA, then the CA/CL ratio
will be less than 1, or shown in brackets. In that case where will the
money come from to pay us?
So, for our purposes Current Assets must exceed Current Liabilities.
But be aware that the situation might still actually be worse than it
appears, even given a positive CA/CL ratio. That is because Current Assets
include stock — which might be overvalued or unsaleable. A company’s
stock figure could include goods which, because, for example, of a change
in technology, or a cancelled order, might only be saleable at a significant
discount. Some indication will be provided by the relation of stock level to
turnover: is it a consistent percentage of sales, or has it gone up
disproportionately compared with the two previous years? Also, does it
seem sensible in the context of your own industry?
More stringent still is the Acid Test: Cash + Trade Debtors
Current Liabilities
That is nearer real cash. But there are no absolutes: how secure are
those debtors? What is today’s workshop about, after all?
In respect of all the information provided, one thing you always want to
see is whether the position is improving or declining over the three years
shown. So always look for trends. When you think about it, trends may
in many ways be more important than just the latest figures in
isolation.
Next, what about the company’s payment record? Do not ignore the large
plc customer, who is very often in a strong position shown by this end-of-
year snapshot. If it is likely to become a significant customer it is worth
obtaining its published accounts. (Just ask for them). The point here is,
not the risk, but a plc using its clout to delay payment. What the published
accounts now have to show you, but which the snapshot may not, is the
speed at which the plc pays its creditors — that means you.
The ratio here is: Trade Creditors x 365
Turnover
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The answer gives you an indication of the thickness of the walls you might
have to break down in order to get paid on time. If they pay everyone at
the end of each month following the month of invoice, the answer will be
about 45 days. Allowing for legitimate queries and inevitable interruptions,
60 days would not seem altogether unreasonable, would it? If that is the
case, it should not be difficult to lever yourself to the front section of the
queue, among “the 45 dayers”. In fact the Companies Act now requires
plcs to publish in their annual report the average days taken to pay their
suppliers. The Federation of Small Businesses has also begun publishing
name-and-shame league tables showing the average payment times of
plcs.
If a report is awful ask yourself (and the customer!) why on earth you
should expect to be paid on time ahead of the others.
You can keep a check on the efficiency of your own business in collecting
the cash, using the same ratio, but substituting debtors for creditors.
Your own collection period will be:
Trade Debtors x 365 = Days
Turnover
If you can collect your debtors in 45 days while paying your creditors in 60
days you will be ahead of the game. It’s a small world, though: you will
seldom do yourself any favours in the long run by gaining the reputation
of being a bad payer. Once you have understood and mastered the steps
involved in creating truly productive customer relationships, it will become
equally obvious that it is worth maintaining good relations with your
suppliers as well. They can choose their customers too! That means
arranging to pay in 60 days, not just breaking your previous agreement
to pay them earlier. If your suppliers are content for you to pay them
more slowly, so much the better. Re-consider what we said about the quid
pro quo for stage payments. When the boot is on the other foot and you
agree to pay part of an invoice up front, or early, ask to delay the
remainder.
The information you need about customers is not so readily available in
respect of partnerships or sole traders. Bear in mind the following. In
asking to see their accounts, you are effectively asking to look at their
personal pay cheques. The information is extremely confidential.
Diplomacy and tact are required.
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In this case you may well have to ask for trade references. The problem
with trade references is that is that it is very dangerous nowadays for
anyone to put in writing anything negative about a company. You
therefore need to telephone the referee(s) and try to obtain a better
flavour, off the record, behind the written information. Speak to as many
people in the trade as you reasonably can. When you do obtain trade
references, try to find some referees other than those selected by your
customer himself. He is clearly going to try to offer you only those whom
he thinks will respond in his favour. Make life easy for respondents with
printed forms, tick-boxes and pre-paid envelopes.
Name and Address of Business………………………………………………………….
How long known…………………….years……………….. less than one year?
What terms?...............30 days…………….. 60 days……………….longer?
Monthly sales < £1000………… £1000-£5000…………………..over £5000
Payments prompt?....................... 30 days late?.................Later?
Name of payments contact…………………………………………………………………
Is there any other useful information you can help us with, please?
…………………………………………………………………………………………………………….
…………………………………………………………………………………………………………….
…………………………………………………………………………………………………………….
…………………………………………………………………………………………………………….
Thanks for your assistance.
Also, you might like to consider the following pointers:
The safest way of trading is through a limited company: limited liability for
the boss. So why don’t the owners of the business take that option? Might
there be a particular reason for them not to trade as a limited company?
Pay attention to the number of years they have been in business. What
were they doing before? There has to be at least a possibility that they
were formerly directors of a failed company, or have been banned.
There is regularly published the Register of County Court Judgements. If
you are seriously concerned about your existing or potential clients, have
a look at that or use a company specialising in that information.
It is not all bad news.
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Case Study:
One of my own favourite customers was an idiosyncratic high-
fi buff who was a globe trotting multi-millionaire. He never
divulged any financial information he could possibly avoid, but
pointed several of his own trade contacts in my direction,
every one of whom became an excellent customer as well. One
could hardly ask for better than that. I like to think that he
recognised that we asked responsible questions in a
constructive manner.
The 80/20 ratio, that crops up so unerringly in business generally,
indicates that you are likely to be prepared to provide credit for 80% of
your customers, based on the briefest information provided by the agency,
although some of them you may wish to keep under closer surveillance
than most. Importantly, you now know who those are.
Discuss with your accountant the overall level of your debtors in relation
to the strength of the rest of your Balance Sheet. One common rule of
thumb calculation is that no single debt should amount to more than the
lower of 10% of your net worth (shareholders’ funds), or 20% of your net
current assets. This is another way of saying it is extremely dangerous to
be reliant on one big customer.
If you are just starting up a new company, you have a clean slate to work
from in the process of vetting customers. Those already in business have
a more rigorous programme, which simply must be followed correctly,
step by step to clean up the debtor schedule and bring the difficult cases
into line, without causing offence.
Surprisingly, as we shall see in Module Five, this too can be done in such a
way as to improve customer relations, rather than damaging them.
Recap: Core Message for Module Four.
You must obtain status reports on every new customer.
Exercises for Module Four
1. Give four reasons why you should credit check all customers.
2. What four items of information must you have in order to make
a credit judgment?
3. What is the Acid Test?
4.How might a stock figure be stated as higher than its realizable value?
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Your Notes and Answers to Exercises
1.
2.
3.
4.
Module Five
You will learn:
How to ask customers about their accounts and have them think better of
you for doing so.
How to refuse to provide credit and retain a happy customer.
When not to provide credit facilities.
What you must remind, and keep reminding your own staff.
HOW TO ASK CUSTOMERS ABOUT THEIR ACCOUNTS
In respect of the likely 20% of your customers for whom the agency’s
information is inadequate, or surprising, a friendly phone call is the next
step.
You speak only to the Managing Director, or the Finance Director.
Never ever query your customer’s financial status with one of their
staff. That is extremely rude and could be seriously damaging.
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Just think of the effect on your own staff if the boot were on the other foot
and one of your suppliers rang to say that your accounts looked worrying
and they weren’t keen on allowing your company any credit. That staff
member has perhaps never seen the published accounts; most probably
wouldn’t fully understand them in any case; can’t comment usefully on
them and now thinks your business is going down the pan. He or she will
begin to consider looking for alternative employment, having first voiced
their concerns with a few work-mates and family. Some of the latter
happen to work on the same industrial estate and before long your
landlord is worrying: hardly a sound and friendly basis for establishing a
long and fruitful trading relationship.
You will find the names of the Managing Director and Finance Director on
the Agency’s report.
Essential Format:
“This is Ted Rose of McQueen Rose Limited. As a matter of
routine we are sent an annual search report on all our
customers” [or] “a credit reference agency report on all our
new customers for whom we wish to set up a credit account.
As you will be aware your (200…) annual accounts look
somewhat unusual in that....... Can you help me, please?”
I cannot emphasise too strongly the message that your credit
check must be presented as being absolutely routine and bears no
implication whatever about the credit worthiness of the customer
to whom you are speaking.
Note also: I call it an agency report, not a credit check, which would
sound as though we doubted their integrity. Just consider the ‘warning off’
effect on you of the words, “subject to status”, at the end of all those
supposedly wonderful television special offers.
The customer’s answer in nearly every case will be quite valid and
understandable: something odd happened, a one off occurrence. Their
company has been taken over, or technically re-structured in some way.
This presents you with an opportunity to enquire how things are
progressing as a result and whether you can re-package your own
company’s offering more appropriately for their changed circumstances.
Your credit check enquiry has been turned into a friendly,
constructive, sales call.
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Many foreign owned companies are deliberately financed to create profits
at home, rather than in the UK. Apart from tax differences, it stands to
reason that they will normally have incurred more costs at home to offset
against income. The parent’s guarantee of support is all that underpins an
otherwise weak UK balance sheet. You must obtain that guarantee, if it is
humanly possible, even though, when push comes to shove, it may be
worthless. It is all too easy for a foreign company to jettison an overseas
subsidiary which isn’t performing, or if the parent Board decides on some
new strategy.
Again, just as when making enquiries of UK companies, look for ways in
which you might be able to enhance your offer to them. There are plenty
of opportunities for smoothing commonly encountered barriers to
international trade without undue effort. Look to nullify time differences,
distance, or language problems. Electronic technology, video conferencing,
e-mail and so on can work wonders given a modicum of thought.
When not to give credit
More often than not, your customer actually thinks better of you for going
about the business of establishing credit status information in a
professional way. So long as you behave with a duty of care attitude and
avoid any impression of arrogance, you will enhance the image of your
company. The customer’s subconscious thought will be that if you are well
organised in one aspect of your business, chances are you will be equally
efficient in other areas, such as delivering your product or service.
Reinforce this by explaining that your reason for attention to such
detail in setting up credit facilities is precisely so that you can
concentrate wholeheartedly on delivering your product or service.
It is entirely in the customer’s interest.
One of the most common danger signs is that the information at
Companies House is out of date. A company doing well tends to want to
have its accounts published as soon as possible and advertise its success.
Those with disaster written all over them will naturally delay, aiming to
shield their dilemma from public scrutiny for as long as possible.
The open response to your natural enquiry about their accounts being out
of date will be to offer to fax you at least their latest, audited balance
sheet. If everything is reasonably satisfactory, that is all you need to see.
Every now and again the response is less than fully open and constructive.
Alarm bells should be ringing and red lights flashing on your mental
computer screen. If the answer is anything other than an equally
professional understanding of your situation, watch out! You have been
warned. You have been warned, not by me, but by the customer himself!
He is strongly advising you not to provide him with credit.
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You may still want him as a customer, but on your standard terms, which
you will recall are for cash on delivery. So your next move has to be to try
to find something to offer to show that you want him as a customer, that
you are not deliberately putting obstacles in the way. The aim must be to
demonstrate, not only your professionalism, but that your service will be
even better than he expected.
There is a whole range of sweeteners you can offer: light at the end of the
tunnel and improved delivery of your product. “You’ll be aware how careful
one has to be these days. May we keep you on Pro-Forma terms [until
your next accounts are out] or [until we’ve worked together for six
months]? In the meantime [we won’t cash your cheque until your goods
are ready / we’ll process your order faster / we can give you a discount for
cash in advance].”
Note: do not offer a discount for prompt payment, which is different and
very dangerous. [See Module Six.]
A word about exporting
Quite clearly, it is even more important to secure arrangements for
payment of exports than on the home market. Fortunately, any reputable
importing customer will recognise this. The techniques for securing
payment are well established and widely available through your bankers.
There are two words of advice only. One, use export guarantees at the
outset. Two, be sure that you have extremely valid reasons for deserting
letters of credit.
A final reminder: all this credit checking is always worth while because
your sales efforts will then be concentrated only on good customers. You
will never be wasting time on rotten prospects that can’t pay. Everyone in
your organisation should cheerfully acknowledge that a sale is a sale only
when it has been paid for.
In Module Six we shall set about making it as easy as possible for the
customer to pay.
Recap: Core Message for Module Five.
Ask customers about their accounts in the same low key, perfectly routine
terms you would expect them to use to you in similar circumstances.
If their answers are not open and helpful, heed their warning.
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Exercises for Module Five
1. To whom do you speak?
2. How do you know their names?
3. List three danger signs.
4. Suggest three sweeteners possibly applicable to your own company.
5. Name two security tools for exporters.
Your Notes and Answers to Exercises
1.
2.
3.
4.
5.
Interlude
How we used to do it.
We had a major plc customer who always paid us late. One of my
colleagues, who was responsible for their account, had the bright idea of
sending them a cheerful note suggesting it might be wise to pay on time
in future and he enclosed a spoof photo of our new credit controller.
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“Our New Credit Controller”
Back came an equally civil letter from the plc’s buyer, saying that it had
been a great pleasure to meet our new credit controller, particularly for his
Managing Director.
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He enclosed this photo:-
“Your charming new credit controller after her meeting with our
Managing Director”
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My colleague promptly replied, saying that he felt very guilty for having
omitted to mention that our new credit controller was married:-
“Our new credit controller’s husband negotiating with a
recalcitrant payer”
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Module Six
You will learn:
Why “30 day terms” are the road to ruin.
The answer to the credit conundrum: why 45 days ensure payment sooner
than 30 days.
Why 35 days are best of all.
How the dreadful job of chasing overdue accounts changes into that of a
friendly quality evaluation to ensure the customer is delighted.
How to gain an entire month’s advantage in resolving any
problem/complaint a customer might have.
The advantages and dangers of discounts: for cash, for prompt payment
and retrospective.
“30 DAYS” — THE ROAD TO RUIN
Every company that trades on 30 day terms will inevitably have
problems with late payment of their invoices.
Before we examine the reasons for this, please ask yourself the question,
“Thirty days from when?”
The invoices from those companies which use these terms commonly
state, “30 days, net.” Net simply means without any deduction or
discount. Sometimes the 30 days stated means from date of invoice. They
can also be from receipt of invoice. Again, they may sometimes be from
the date the job was completed. We will consider this little matter again in
a moment.
Why do I insist they are so iniquitous?
First, inevitably, some of those deadline dates will fall on Saturdays,
Sundays, or Bank Holidays. What is the intention in those circumstances:
payment in 27, 28, or 29 days? In reality, of course the customer always
pays, at best, during the following week. So there is a mutually agreed,
built-in, late payment factor, not mentioned, but clearly understood.
Second, virtually all companies of any size have payment systems that
operate on the basis of one or two cheque runs per month, or per week.
They do not have systems for identifying, and then paying, large numbers
of small amounts on every day of the month, to accommodate all their
suppliers’ 30 day invoices.
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This means that no supplier to those companies is actually trading on his
own “30 day terms” at all. He is trading on the purchaser’s terms. Who
knows what they may be? 60 days? 90 days? In reality, when the supplier
complains of late payment, he may in fact be being paid reasonably to
time, according to the purchaser’s terms.
That supplier, because he has accepted the purchaser’s terms by default,
or usage, does not have a leg to stand on in law. No purchaser is going to
shout about this state of affairs, but it does permit him to ride roughshod
over the supplier’s supposedly agreed terms. This alone is a sure source of
many accusations of large companies unfairly abusing the weaker
bargaining position of small companies. Naturally, any supplier who hasn’t
bothered to think about workable terms for his customer lays himself wide
open to abuse and bullying.
Third, the supplier’s accounts department, when they telephone to chase
payment, do not actually have a clue when that invoice is due. They don’t
exactly know when it arrived in the buyer’s hands. Which post did it catch?
Was it stamped first or second class? Will it have been entered in this
month’s purchase ledger, or next?
So precisely what sort of telephone conversation will the two accounts
departments be having? It will certainly not contribute to the supplier’s
image of excellence and efficiency in the opinion of the customer. In
effect, the supplier is saying, “You have our invoice there, I hope. When
would it suit you to pay it, please?” In practice it is almost impossible to
have payment confirmed before it is due.
The only correct procedure is to agree for payment to be by the
end of the month following the date of issue of the invoice.
It remains essential that invoices are issued as soon as possible after each
job is completed, because customers will continue to play the game of
trying to slot month-end invoices into the following month.
However:
The payment terms will now accord with every customer’s cheque run
arrangements.
The supplier can now ring the customer before the payment is due, not
wait until it is overdue before he can do anything.
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The relationship between accounts departments is now completely
different, because the previous chasing of overdue accounts implied
blame. In contrast: “I’m just ringing for confirmation that the payment will
be in this month’s cheque run,” is perfectly friendly and reasonable. It is
no longer a call to chase payment, but first and foremost a quality check
that the service or product has been delivered to the customer's
satisfaction. It dovetails perfectly with the company’s CRM objectives.
If, for any reason, the expected payment has not been scheduled, the
problem can be identified in advance. Again, on 30 day terms, the process
of rectifying problems that will have already resulted in withholding
payment is not helped by the supplier’s suspicion that they could be a
delaying tactic rather than a true problem. Now, if the customer has a
complaint, it can be identified, on average, some two to three weeks, even
a month, earlier than before.
(Product supplied, say, 15th
of month one; query now raised 15th
of month
two, plus say, at worst, a week = 37 days. As opposed to previously,
same date of supply, 15th
of month one; no contact usually before the end
of month two, then into week 1 or 2 of month three = 52, or 59 days.)
Once more there is a huge positive image bonus for the supplier, with the
opportunity for prompt and positive rectification of queries. The full
implications of this are seldom understood. Colin Barrow, Head of the
Enterprise Group at Cranfield School of Management, quizzed members of
the Institute of Directors: “What is the single most important reason for
customers to defect to the competition?”
His own researched answer is: indifference to complaints.
Regardless of whether complaints are imaginary, concocted, or perfectly
genuine, on 30 day terms they will invariably have been allowed to fester
for a seriously damaging length of time.
Internally, the job of the person who once chased overdue payments has
now been changed to routine, uncontentious contact with customer
accounts departments in a completely different vein. It may even become
fun for her (it’s usually a lady) to come to work each day.
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On the other hand, the theoretical credit period has now been extended
from 30 days to 45. The obvious answer to this is to change terms of
trade to payment by the 20th
of the month following month of invoice.
Even then, in explaining these latter terms to a customer, you will be able
to point out that you would still be providing an average 35 days credit,
instead of the iniquitous 30.
In practical terms though, it has to be borne in mind that payment terms
have always to meet the customer’s capabilities in order to be effective.
So you may have to modify your arrangements in respect of those
customers with, for example, set cheque runs at the end of the month.
However, regularity is far more significant than the actual date of
payment. In the case of a regular customer always paying, say, on the
last Friday of the month instead of the 20th
, it is only the first payment
that makes a difference. Asking for payment by the 20th
merely provides
an extra cushion, giving ten more days to ensure payment before the
month end. I found this most helpful at the outset, when we were
developing improved debtor management, which involved training our
customers while adjusting our internal controls as well.
[See Module Eight on duties and routines for accounts departments and
sales departments.]
There will be measurable cost savings in clerk’s time, supervisor’s time,
telephone bills, photocopying, postage, stationery, the time of senior
management travelling to try to extract money from late payers, legal
fees, more management time.
The combined effect will lead to truly remarkable improvements in the
reputation of the company among competitors as well as customers,
leading to increased turnover from referrals. This becomes a company
everyone wants to trade with, creating increased shareholder value. That
reputation will also help towards making staff recruitment easier.
Finally, and perhaps most important of all, the M.D. can sleep at night!
All this follows simply from selling on workable credit terms — while of
course there will be more money in the bank. Wow!
Discounts for early payments
Prompt payment discounts are dangerous and frequently create
unforeseen problems.
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For example: “Less 1.5% for payment in 10 days”
Your customer then pays in 12 days, having deducted the 1.5%. Now
what? Are you prepared to have an argument about some fiddling amount
like 75p or a fiver, which will inevitably lead to ill will on both sides? You
are accusing him of cheating. He thinks you are being ridiculously petty,
quibbling over such a tiny amount. Both of you are right. None of which
helps contribute in the very least to the ongoing constructive, customer
relationship management (CRM) ethos you are trying to build, or to the
reputation of your firm.
I wouldn’t mind betting that exactly the same will happen when companies
begin to add supposedly penal, late payment interest to their invoices.
Case Study:-
When I was farming, we used to buy diesel fuel in bulk. For
some reason, although the price had been agreed beforehand,
the invoices always offered an additional, “less x% for payment
in y days”.
The first time, I deducted the interest, wrote out the cheque
and envelope, then found I’d run out of stamps, and left the
envelope in the farm pick-up. It was by a perfectly genuine
series of errors that they received the money about 10 days
late. What happened? Nothing. So then, thinking, “What idiots”,
I played the game out of sheer cussedness and always
deliberately paid late, having deducted the discount.
What is more, their rep. used to come round from time to time,
enquiring about distilled water, or oil and offering still lower
prices if I bought 5,000 gallons at a time instead of 2,500. He
never once mentioned my unauthorised discount. Evidently,
nobody had bothered to tell him I was a rotten customer. Why?
Was it worth their while having a rep. in the first place? Not his
fault, but his visits meant that I thought less of that firm than I
would have done without him.
Discount for cash, up-front, or in advance, is a completely different
matter. You have control. You are providing clear evidence of your good
faith in that, by lowering the price slightly, you are balancing the
advantage to you of having the money earlier.
An apparently similar option is to agree to give quarterly rebates by way
of credit notes against invoices, provided that all that quarter’s invoices
have been paid on time. The advantage to you, the seller, is that it is
comparatively easy to work out the post-rebate, net price in advance.
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Buyers will usually ensure that their accounts departments enable them to
qualify for the lower price. Again, they can only do this if everyone knows
what “on time” means. It is virtually impossible with 30 day terms, leading
once more to accusations of duplicity.
Quite apart from anything else, though, discounts are extremely
expensive. They have to be significant in order to grab the attention of a
buyer and induce take-up. As an example, 1.5% discount for payment in
ten days, which doesn’t sound a lot, is the equivalent of 26% p.a. While
2% for ten days is a whopping 36% p.a.
Is it worth it? There can’t be many business situations where it would not
be far cheaper and more economical in every respect to ask for payment
by the end of the month following date of invoice: clear, clean and open.
Recap: Core Message for Module Six.
Never on any account trade on 30 day terms.
Payment by the end of the month following month of invoice is correct; by
20th
even better.
Exercises for Module Six
1. Give six reasons why “30 day terms” invite disaster.
2. List five benefits of asking for payment by the end of the month
following date of invoice.
3. List three different types of discount scheme.
4. For each of the above give one reason to beware.
Your Notes and Answers to Exercises
1.
1.
2.
3.
4.
5.
6.
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2.
1.
2.
3.
4.
5.
3.
1.
2.
3.
4.
1.
2.
3.
Module Seven
You will learn:
How to explain four clear benefits to a customer of payment by the end of
the month following date of invoice, instead of “30 days.”
Why debtor management is for salesmen, not accountants.
Why your debtor management centre is in the sales and marketing
department, not the accounts department.
How to ensure you know the correct identity of every customer.
The simple way to keep customer information as accurate as possible.
Two supreme objectives from accurate paperwork.
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FACE TO FACE — THE SALES MEETING
Winning Orders and Contract Review
The first steps in establishing your practical relationship with a customer
are to understand what that customer requires. Then to make sure you
can supply at the appropriate quality, to time and meet the expected price
parameters. Naturally, in addition to the price itself, payment terms are,
in every case, an essential part of this process, technically known as
contract review.
From this it becomes abundantly clear that the first part of a salesman’s
job, having achieved that face to face (or telephone) interview, is to ask
questions. In essence, how will the buyer judge excellence? Part of the
total information pack and therefore part of the selling company’s total
service offer must include the buyer’s preference for payment terms from
the variety available.
The two most difficult aspects of a salesman’s job are asking for the order
and, even worse, asking for the money. By finding out how the buyer will
judge excellence, including his preferred payment terms, the salesman
levers himself into the classic situation of being able to close:
“If you are satisfied with the quality, and I can supply this quantity,
guarantee that call off rate, and provide facilities for you to pay by these
means, may I have the order?”
Difficult for the buyer to refuse:-
Quality,
Quantity,
Timeliness,
And Price.
The salesman must start from the understanding that the best terms are
for payment up front and move on from there, depending on the particular
industry. He is then able to offer to arrange credit terms as an additional
service: “Would you like me to have a credit account set up for you?” He
explains his company’s preference, but within the context of enquiring
how the customer’s cheque runs are scheduled, whether they actually pay
against statements rather than invoices and so on. He also uses the
opportunity to discuss discounts for C.O.D., (not for prompt payment,
note!) or split payments for smaller but more frequent deliveries; (easing
the customer’s cash-flow) all emphasising the totality of service and the
concept of, “Getting all the paperwork tied up properly so that we can
concentrate fully on meeting your real needs.”
48. 144
Most importantly, you will notice he does not say anything like, “Subject
to credit checks”, or mention limits. That will be for boss to boss
discussion, should it arise, later.
Some powerful retailers routinely demand sixty, or even ninety, days’
credit. Assuming this is an acceptable part of the deal, it remains just as
important to translate that into, “Payment by the end of the second or
third month following month of invoice.”
Anyone with any experience of selling will recognise that having a written,
standardised ordering and credit management system in place, and
available for reference, makes life immeasurably easier. The requirement
is for sufficient flexibility to meet your particular industry’s likely range of
situations, but backed by a professional framework.
I repeat, this means that in order to provide the sales team with the
maximum support, the selling company must have a written credit policy.
Sales staff will also be armed with Order Forms, Acceptance of Order,
(which in practice usually means management counter-signing the order)
and Credit Application Forms.
[Please see your pack at the end of the Modules.]
“All that paperwork: sounds way over the top for a small firm like ours!”
The reality is that the forms can be very simple and each one of them
must be designed to help make a salesman’s life easier. Let me give a few
examples.
Case Study:-
A waiter in a restaurant always writes down your order,
together with a note of how you would like your steak cooked.
He returns to say that they’ve run out of beans, would peas do
instead? Order and Acceptance of Order. If he has been trained
to write the order out in sequence, he will be able to serve each
guest the correct dish, without having to ask, “Was you the
grilled cod?” The actual food itself may not have changed, but
what is your own reaction? If you are like me you will feel that
the service is better, subconsciously expect to pay a higher
price and will probably leave a more generous tip.
Not only that: at the end of the meal, the customer actually
asks for the bill. If he wants to open a credit account, he will
expect to have to talk to the manager in advance and at least
fill in his name and address: Credit Application.
49. 145
Builders make meticulous notes about a job at the outset and
do all the right things, commonly giving valid sounding reasons
for some payment in advance. In spite of which they still end up
in the Small Claims Court because, at some point during the
work, the customer said, “While you’re here could you just………”
Solicitors would lose half their business if builders stuck to their
rules.
Most often, of course, Acceptance of Order is an integral part of creating
the Quotation in the first place. It is fundamentally important to realise
that it exists, nonetheless. It is just the high falutin’ names one doesn’t
recognise.
The relationship between this process of contract review and late payment
was made abundantly clear from a survey undertaken by the Credit
Management Research Group. [Credit Management, Late Payment and the
SME Business Environment, 1997]
This found that of 500 small businesses interviewed, 52% did NOT
formally agree payment terms with customers before the sale. Less
than 20% had a credit policy. Compare those figures with the 48% of
companies in favour of charging interest on late payment and you begin to
understand the emptiness of the clamour, I hope.
So the rule has to be: if you can, always get all orders in writing and
signed. Very often you can take a telephoned order and ask for faxed or
posted confirmation. If that confirmation fails to materialise: stop work.
You don’t have to be stroppy about this: “It is just to ensure that we have
your requirements correctly understood, Sir,” or, “Would you mind just
signing this chit for me, please, Sir?”
There are two objectives in all this seemingly pernickety paperwork:-
One: ensure that you meet the customer’s over-riding criterion of quality,
whatever that might be, which enables you to charge higher prices.
Two: obtain absolutely correct details for invoicing, which will avoid
delays in your being paid.
This is why credit control is for salespeople, not for accountants. It is
salespeople who set the scene and establish the initial relationship. The
entire management of a company’s debtors flows on from this.
50. 146
Case Study:
Lessons from an Enjoyable Interlude.
We had a minor break-in some time ago. Not the enjoyable
interlude to which this refers! In the early hours of the morning
we called in an Emergency Boarding Up and Glazing Company.
They came extremely promptly and provided an excellent
service. I would unhesitatingly recommend them.
Even more so, when their invoice arrived, the payment terms
on it stated, “Payment by return for Emergency Work”, which
seemed to be perfectly fair: prompt payment for prompt
service.
The only thing was that their invoice was issued a full three
months after they had done the job. I hope that they will have
managed to stay in business if we ever need them again.
Have a smile, but note that they missed two tricks. Not only
were they ages late getting their invoice out, but what is your
own attitude to paying your bills? You might delay paying the
unimportant ones, but for an Emergency Service, you would be
perfectly happy to pay immediately, wouldn’t you?
Certainly, they could not have been expected to prepare an
invoice in the middle of the night, but they had to return to
replace their boards with new glass and could perfectly easily
have asked for the money then.
If you are in a trade with an emergency element, always obtain payment
there and then. Your customer will still be most grateful, strangely
enough, more so. The reason for this is that you are reminding him of the
special efforts you have made on his behalf.
Do any of you think: “Doesn’t apply to us, I’m afraid.”
Oh yes, I’ll bet it does! Almost every business has customers who
sometimes have rush jobs, or emergencies, or crises of some sort. They
always provide the opportunity for you to charge a little more, or to be
paid sooner, or both. Don’t be greedy or take the Mickey. Do take
advantage. Create an element of extra special care and attention to that
customer’s needs.
“Yes we can rush that job through for you, Sir, but I do have one small
problem. You might be able to help me …,” or, “Charlie will have to work
overtime,” or, “I’ll have to get extra parts biked over for which I have to
pay cash up front.”
51. 147
The more disruption you demonstrate while still meeting, or even
exceeding his needs, the better for your relationship.
The customer asks, “Would you be able to have that ready by Thursday?”
“We should be able to produce the first hundred by tomorrow evening.
We could even get Bill to deliver them on his way home. It may be a bit
late though.”
Even if you cannot raise the price on this order, you will certainly be able
to on the next. There will not be much likelihood of your being paid late
either.
Credit Application Form
We call it an Account Facility Form for the customer’s benefit, because
it sounds less threatening.
The details on the application form must be as accurate as possible so that
they can be transferred straight onto the computer system for invoicing.
The opportunity for error is greatly reduced when details have to be
entered only once.
There is a serious benefit to the customer as well. That is an error-free
tie-up between order number, job number and invoice number. The
customer can therefore obtain accurate information at every stage of the
(manufacturing, development, or delivery) process about the progress of
his order.
Note: There must never be any mention of a limit to his credit facility.
Should a customer ask about a limit, the answer is, “The only limit is your
ability to pay, Sir.” [See Module eight.]
Note the following features about the form:
[Please refer to your pack.]
1. It has the full name and registered number of the company.
2. It has the vat number and details of where invoices should be sent.
3. It agrees to meet your payment terms.
4. It is signed by someone with sufficient authority, if possible a Director.
5. It ensures that the customer has your standard Terms of Trade.
6. It ties in with the order form. [See your pack again.]
7. You, and any covering letter asking for this, will be addressing the
buyer with whom you have been dealing, not the customer’s accounts
department.
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The buyer is your most important ally in the customer company’s camp.
He is the one who needs your product or service and who negotiated the
deal with your sales department. All being well, he is the one who will
wish to order from you again. Should there ever be any problem with
delay in payment, it will be very much in his interests to help sort it out:
yet one more demonstration that the management of debtors is a sales
function.
Recap: Core Message for Module Seven.
Payment by the end of the month following month of invoice assists sales
staff.
Well managed credit facilities and accurate customer information anchor
sales in place.
Exercises for Module Seven
1. List four advantages to a customer from payment terms by end of
month following date of invoice.
2. Name two objectives to be directly gained from accurate paperwork.
Your Notes and Answers to Exercises
1.
1.
2.
3.
4.
2.
1.
2.
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Module Eight
You will learn:
One thing you should never tell customers.
Why credit limits should be kept as low as possible.
How to maintain control over credit limits.
Positive contributions from the accounts department.
Routines for the sales and marketing department.
CONTROLLING THE ACCOUNT
Internal Routines
You should never tell customers what their credit limit is, or indeed
that they have, or are about to have, any credit limit at all.
Credit limits are solely for your own internal control and on no account
whatever should they be divulged to customers.
Consider for a moment your own reaction when your credit card company
notifies you of your new limit. It is either insultingly low, or stupidly high.
In no case does it enhance your opinion of the card company.
Effective management of your company’s debtors dictates that credit
limits should be kept low, in order to highlight any increase in demand as
well as any late payment. Therefore, if you advise a limit to a customer,
you will be actively dissuading him from expanding his business with you.
After all, he doesn’t know why or how you arrived at that limit, or (maybe)
that you would be delighted to increase it. Nearly every single one of my
large customers started as small ones (customers, not companies). If they
had been told they had credit limits the effect would have been to turn
them away, inviting them to go to a competitor. The very last thing I
would want, given that we’d acquired and vetted them in the first place.
Remember that part of the object of the vetting process is to identify
customers with the potential for further sales, or of a greater range of our
products.
One of the key imperatives in Module Five was that you must talk only to
a customer’s Finance Director or Managing Director about their financial
status. If you tell that company’s buyer that their credit limit is £xx, and
remembering that £xx will be fairly low, you are bound to make him
wonder why. So we are back to undermining relationships again, instead
of building them.
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You tell me why professional credit managers report a continuing lively
debate on the subject!
Internal Authorisation
Having decided on the terms on which you are prepared to trade with any
given customer, it is absolutely vital that your efforts cannot be overruled
by anyone else. You therefore need an internal authorisation form, even in
very small companies, to record credit limits, or stating pro-forma only.
Modern computer systems can be written easily enough to lock out pro-
forma customers from the credit A/C system. This is vital in order to
prevent yourself providing credit to the very people you wished to avoid.
The credit limit serves 3 purposes:
1. You decide how much credit, of course.
2. The limit will be triggered by late payment.
3. The limit will also be triggered by increased volume of business.
You must have credit limits for all customers and you must ensure that no
one changes them without your authority. So your internal paperwork
must be signed by yourself, the boss. Your business will have grown to a
fair size, say £5 million turnover, or have a Finance Director, before you
will have someone commanding sufficient trust and with the necessary
depth of understanding for this to be delegated.
[Again, a suggested format is included in your pack.]
There are three ways a customer might hit his limit.
1. He might not have paid his bills on time.
2. His level of orders might have increased.
3. Third, and most dangerously, both might happen at the same time.
By having a limit system, you are obliged to investigate and take
appropriate action in every case. If orders are increasing, you have the
opportunity to ring, thank the customer and ask how you might help him
still further, while re-checking your underlying credit risk as you did at the
outset.
Duties and Routines for the Accounts Department
You have to develop a routine and stick to it. Actually obtaining payment
is just as important as doing the work for the customer in the first place;
technically, more important.
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Your accounts department must fully understand this. One way of
reminding them is to refuse to pass orders for your own (less urgent)
supplies until the cash is collected. That way the purchasing side of your
business is helping with the credit control and your staff needing those
supplies will know if accounts are doing their job properly.
The accounts department has to perform the following functions in regard
to credit control. First, produce three sets of paperwork;
Invoices, Monthly Statements and a Weekly Debtor Schedule.
Invoicing
[A check-list sample invoice is shown in your pack.]
It is vitally important to double check that the first invoice to a
new customer is absolutely correct:
Customer Name spelt correctly.
Addressed to the Accounts Department correctly - (not to some
manufacturing depot).
Marked for the attention of?
Customer reference / order number, delivery docket.
Date.
Is the description of the goods or service the same as on the order
form?
Are any printed terms of payment on your invoice the same as those
agreed with the customer?
The accounts department must put their heads together with the sales
department and thoroughly cross check this first invoice. It is imperative
for all your subsequent control of the account that the customer sees you
as being utterly on the ball and professional. Once the first invoice is
correct, the likelihood of subsequent errors becomes very small.
Even though yours is a two-man business, it remains seriously important
to get it right — more so in many ways. You don’t have the resources to
squander on rectifying mistakes later.
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Initially our relationship has been with the customer’s buying department.
His accounts department doesn’t know us from Adam. So send a pleasant
covering note with that first invoice: not a “Dear Sir/Madam, the highways
department apologise for any inconvenience caused by digging up the
road,” sort of letter, when we all know they don’t actually care a fig about
us trying to get the children to school, or being late for that important
meeting at work. Send a personal letter, marked for the attention of the
Accounts Department Manager. The name is on the Account Facility Form.
He or she is about to become one of your best friends, after all. Point out
that you are a new supplier and that you want to make life as
straightforward as possible for him or her. Invite them to check the details
on this first invoice to ensure they reference the correct order and delivery
numbers. Include the name of the person in your company they should
telephone if they have any queries, giving phone, fax and E-mail address.
Remind them how, when and where payment should be made, even
though it says the same thing (check!) on the invoice.
Although I remain utterly convinced that the quality of advice delivered
through the Better Payment Practice Group is astoundingly misdirected
(being mostly concerned with chasing overdue accounts), I am equally
sure that the concept itself is eminently sensible.
One of our own suppliers has recently impressed me by incorporating the
Better Payment Practice Group logo into its invoices. This immediately
gives the impression of a business that is dedicated to high principles of
ethical practice. It also manages to convey the thought that if we fail to
pay them on time, we would be letting ourselves down by comparison,
clearly demonstrating that we don’t qualify for membership of the same
‘top companies’ league: quite clever. You should do the same on your
monthly statements and even on your Terms of Trade.
The same goes for Prompt Payer. Find their link and logo on our website.
Integrity and best practice: your customers will wish to be thought of as
members of that particular club.
Make sure that you send out all invoices as soon as you possibly can. That
means as soon as the goods are delivered or the service provided. My
Scots blood makes me hate wasting pennies unnecessarily on first class
postage, but this is one time when it is entirely justified. There is no point
in your racing about sending out invoices right on the button, if you then
negate the entire effort by allowing the Post Office to deliver them at their
leisure.
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When a job for that particular customer is spread over several weeks or
months, or has to be completed in sections — as it can well be, for
example in the building trade, or for solicitors — it becomes quite common
practice to arrange for stage payments. It is almost equally common for
suppliers with that advantage to become sloppy about sending out
invoices as the job progresses. When you have been astute enough to
arrange stage payments, it makes absolutely no sense to fail to enforce
them.
It will depend on your terms of trade, and your arrangement with that
particular customer, just how serious the late presentation of an invoice
will be. Many suppliers charge about at the end of each month, sending off
invoices. Not only is this last minute rush likely to cause errors, and
hence promote queries, thereby automatically inviting delayed payment,
but the more astute of your customers’ accounts departments will
routinely enter those end-of-month invoices in their bought ledgers as at
the start of the following month. They then innocently claim that the
invoice isn’t due until a month after that. Simple, inn’it?
It is very hard work running a small business. Keeping the books regularly
up to date is a chore many of us hate. However, it is much more fun to do
them while looking at a healthy bank balance, rather than juggling to keep
within an overdraft limit. Prompt invoicing is the first step to good financial
health, sleeping well, having a laugh.
It should be recognised that your customers, whom you would expect to
have well run accounts departments themselves, should be conserving
their outgoing cash. That doesn’t mean they are being dishonest, or even
particularly difficult. It is just sensible to pay promptly for prompt service,
or goods that are fundamental to the viability of the business. Other
suppliers, who do not seem particularly bothered, or don’t get their act
together, will inevitably be paid later. Once you have educated your
customers to place you in their priority stream, you tend to stay there.
Look at your own attitude to your suppliers. You have a decent business,
collect your cash on the nail and could well manage to pay them all on
time. Yet it is amazing how many of them simply don’t bother to ask you
for their money properly.
Your own invoices must be clear and uncluttered so that they are not
confusing to the customer. They must contribute to your overall image of
efficiency and quality. Furthermore, it seems to me that to a degree they
might also be used as part of your overall marketing strategy.
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The conventional thinking has been that invoices are seen only by the
accounts department and therefore have no influence on the customer’s
attitude, one way or the other. That has not actually been entirely true of
my own businesses, so why should others’ be any different?
In the first place, I personally initial all invoices coming in to us, to clear
them for payment. In other words, Managing Directors do see invoices.
Secondly, our accounts manager sees it as part of his function to bring to
our attention all manner of special offers, especially with regard to the
sort of consumables that his department uses. This covers computer
equipment, software, stationary, and so on, but also various other aspects
of the business that come into his orbit, such as training courses, cleaning
products, tea and coffee for visitors: almost everything that is not ordered
by someone for a specific project or that doesn’t relate to a technical
requirement.
Invoicing therefore has a direct link with marketing and invoices do go
directly to the people who control the money! So I suggest you should not
completely ignore the opportunity:
(a) To reinforce the unified quality image of your business;
(b) To include carefully targeted special offers.
But beware! This is a fine line and easy to alienate those of us who hate
junk mail.
Monthly Statements
Send out a statement of each customer’s account at the end of each
month.
If you have the details all correct on your invoices, your software should
run this for you. Make sure statements follow the open item system,
showing all unpaid items. And as with the order of printing your Debtor
Schedule, have statements produced and sent out in order of account
balance, so that the largest go first. That way, if you fail to send them
all out on time for some reason, you keep on top of the greatest debts.
Statements help eliminate queries and identify miss-allocations: good
practice between accounts departments. There may, for example, have
been a perfectly legitimate query about goods relating to one invoice,
which should not be paid. That does not eliminate the need to keep the
customer up to date with the others.
Many companies in fact only pay off their invoices against a Statement,
which gives them a double check that they haven’t paid twice. So
Statements are important. As ever, timeliness is important.
