How much cash do you have sitting in accounts receivable? What if you suddenly had that in your bank account? It would be a day to celebrate! As awesome as it is to get a big check from a slow-paying customer, imagine if that customer consistently paid on time? The reality is that most heavy duty shops struggle with exactly how to collect accounts receivable. So how do you go about collecting cash after extending credit?
Collecting Cash: Why it Matters
Cash is the lifeblood of a business! It’s your working capital. But there are two giant forces working to keep it away from you:
- Vendors want you to pay as soon as possible
- Customers want to delay paying as long as possible
If you don’t fight these forces, you will constantly run short of cash. You want higher emotions and more stress in your shop? Always be short on cash. You want great feelings and low stress? Solve the cash problem. And the good news is, it’s solvable!
How to Collect Accounts Receivable in 10 Steps
So how do you go about collecting cash consistently? Here are the 10 basic steps heavy duty shops should follow to collect accounts receivable.
Step 1: Be careful who you extend credit to
Never forget that by giving someone credit, you are acting as a bank. That’s right! You are a bank. If a bank isn’t careful who it gives loans to, it will go out of business in no time. The same is true of you. The reality is that terms aren’t for everyone. At the end of the day, by extending credit and not collecting cash, you run the risk of losing not only the money, but the customer too. A customer who owes you money and can’t pay will avoid coming back to your shop.
Before extending any credit, set up a professional credit application that lets you collect as much information as possible about the customer. You then must read this application, call on references, and use this information to actually vet them! If you approve the application, have the customer sign a contract that clearly states the terms: time to pay, credit limit, and consequences for not paying. Make it crystal clear to the customer that they must pay you.
Step 2: Enforce the credit limit
You get to decide how much credit to extend. Start with a lower limit for new customers and require them to build up a track record of trust with you. You might give them Net 30 terms, but you don’t have to give them a blank check on the limit. Make sure your managers and technicians know to hold a unit if the customer has violated their credit terms. This means late payment OR going over their limit. This is an extremely effective way to get payment. It also prevents customers who were never going to pay in the first place from coming back over and over and running up the tab.
Step 3: Start early
Don’t wait for the customer to not pay you. Remind them a week or two out that payment is coming due. This can be through a friendly email. If you use the Fullbay customer portal, your customers will see an alert when any invoices are coming due.
Step 4: Don’t wait
When the due date passes and the customer didn’t pay, you must not wait. This is the hard one for some people. It’s an uncomfortable conversation to have, so it’s easy to procrastinate. But DON’T WAIT! The longer you wait to collect accounts receivable, the harder it is. Get in the habit of tackling this as soon as a payment as due, so you don’t have to force yourself to do it out of sheer will power. This can be the hardest step in collecting cash because you probably like your customer, and you don’t want to offend them. But remember, it has been proven in study after study: people WANT to be held accountable. Don’t deny them!
Step 5: The reminder
Believe it or not, your customers might not be as awesome at keeping track of their books as you are. They might have simply forgotten to pay! All they need is for you to remind them. Send out a letter or email as soon as a payment is overdue. Tailor it to the particular customer. Some might need more severe language, others just a gentle, friendly reminder.
Step 6: Friendly but firm
No matter what, keep it professional. The best combination in business are people who are nice but strong. Be that person. As frustrating as it is for customers to disrespect you by not paying, don’t let emotions cloud your decision making. The best way to collect accounts receivable is to strike that balance between friendly and firm. Don’t fly off the handle and threaten to take them to court. But also don’t roll over.
Step 7: The collection call
You sent the email or letter and have received nothing. It’s time to make a phone call. This is a crucial step in collecting cash. Again, you can’t let emotions take over, as frustrating as it is that things have gotten to this point. Focus on the objective: collecting cash. The objective isn’t an emotional release, or chance to share a piece of your mind. Prepare for the call and be ready to calmly, professionally accomplish your objective.
Step 8: The excuses
The hardest part of the collections call? Having to listen to the excuses. Don’t get sucked in. They will have many excuses for not paying, but you have to be prepared to resist these. It can be easy to sympathize, especially if you are non-confrontational. Resist! Remember the objective! Collecting cash is about action. You have to require action from the customer.
Step 9: The installment plan
If the customer is truly in a financial hardship, consider letting them pay you back in installments. An installment plan isn’t ideal–getting all your cash upfront is. But it’s better than not receiving anything at all. Plus, for a good customer this will build tremendous loyalty because you are helping them through a difficult time. Be creative, and make sure that it fits the criteria for a win/win arrangement.
Step 10: Consequences
If you extend credit, you will probably need a debt collection lawyer on standby. Sometimes all it takes is a sternly-worded letter from an attorney to prompt payment. Other times you might need to go to small claims court. Also, consider reporting delinquent payments to credit reporting bureaus. Sure, this helps other businesses avoid the pitfall of extending credit to your customer. But knowing this might happen can deter the customer from not paying in the first place.
Alternative step: Outsource it
Just like you probably outsource some work like alignments or DPF cleaning, you may consider outsourcing your accounts receivable. Companies like Interstate Billing Service handle the credit application, reminders, calls — all aspects of collecting cash. By letting someone else collect accounts receivable, you pay a percentage for their services. But you save the hassle of collections and you get your money the next day. Also, you can compensate for the fee by charging customers who need credit a slightly higher labor rate or slightly richer parts markup.