How long do you tend to leave money sitting in accounts receivable?
Probably longer than you’d like.
In an ideal world, you’d perform a repair or some maintenance and be paid on the spot for it. Alas, we are not in an ideal world; like many other heavy-duty repair shops, you’ve likely provided payment terms or extended credit to many of your customers. There are a variety of reasons why you might do this; some places just won’t do business with you if you don’t allow it. Others may need terms because their own billing cycle doesn’t quite align with yours.
It’s basically money that is owed you but hasn’t been paid yet. The regular accounting term for this is accounts receivable, but we’ve also heard it called the following:
- Money owed
- Money billed
- Balance due
- WHERE’S OUR MONEY (or something more colorful)
Collecting Cash: Why It Matters
Cash is your working capital. You need it both for the daily upkeep of your shop and to continue your growth over time.
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.
Ever been in a shop with low cash flow? It’s a stressful place to be. Now, money won’t solve all your problems – you need to focus on morale and attracting good techs to strike a balance – but let’s face it, steady cash flow can cut down on stress for any kind of business.
The longer your money is sitting out there, the more it’s costing you. Let’s say, for example, a customer doesn’t pay you for 60 days. What would you be doing with that money if you had it immediately, instead of waiting on it? Could you grow your business? Add to your inventory?
You need that money. You are owed that money. When you provide terms to a customer, you’re basically giving them a grace period to get you what you are owed – but they need to hold up their end of the bargain. That may mean giving them a little nudge to get things out of accounts receivable and into your shop’s bank account.
We were pretty sure there were a few ways we could go about that, so we sat down with our friends at Interstate Billing Service to get their advice. They’re an accounts receivable management service, and they have a lot of experience with this type of work.
Your Guide to Collecting Accounts Receivable
How can a heavy-duty shop collect accounts receivable without losing their own sanity or driving off customers? Here are some tips Interstate Billing Service shared with us.
Be careful who you extend credit to
Before anything else, remember that when you give someone credit, you are acting as 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.
We want to make it crystal clear: Since you’re the bank, 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. You’ll also need to decide how to handle customers who continuously pay late, or who, for example, go over their limit. Will you refuse to take in a unit if their last invoice is unpaid? Will you hold on to the one you’ve got in the bay?
These aren’t things anyone wants to consider, but if you’re going to extend credit to customers, you do need some idea of how you’ll pursue those who continuously cannot hold up their end of the terms.
Customer service matters
The last thing you want to do is jump all over your customers demanding to know where your money is. That’s damaging to your relationship with them, and in this industry, relationships can be everything.
Please note, we’re absolutely not suggesting you roll over and assume a customer is just never going to pay up. You should absolutely not let them not pay you. But reminding a customer – particularly a frequent customer – that they owe you money becomes a delicate dance. When you’re popping up in their emails or phone records asking for money, you can turn into the bad guy. Is that fair? Nope. Not at all. But it happens, and it can darken your other interactions with them.
Here’s a sample timeline you can follow to keep things as smooth as possible:
1-2 weeks before payment is due:
Send a friendly email to your customer letting them know the payment is coming due. If you use the Fullbay customer portal, your customers will see an alert when any invoices are coming due.
The day after the due date:
Reach out to the client via email or phone call. Again, we don’t recommend approaching this in a reactionary way. Treat each contact as an opportunity to get an invoice in front of a customer. For example, some larger fleets have entirely separate accounting departments. If you ended up invoicing the driver, it’s entirely possible that invoice didn’t quite make it to the accountant’s office – or it might be buried under paperwork somewhere. Your email or call might be the first time the accountant is hearing about such an invoice.
Starting out with, “Hey, do you have everything you need to process our most recent invoice?” puts some of the responsibility on you, the shop. If a customer hasn’t seen the invoice (or hasn’t gotten around to paying it), you’re essentially making it easier for them to just pay the bill instead of putting them in a defensive position where they feel they have to explain themselves.
1-2 weeks after the due date and beyond:
Actions have consequences.
We encourage you to work with your customers and come to a resolution that makes both of you happy. But every now and then, you may wind up with someone who just doesn’t pay up. Maybe they promise to. Maybe they stonewall you entirely.
You have options available to you: mechanic’s liens and reporting the customer to credit bureaus are typically pretty effective. Most customers don’t want it to come to that, though, which is why you should have other options ready to go. Your customer may have particular issues that are preventing them from paying. If that’s the case, don’t give up on them! You might just need to do a little negotiating.
Be prepared to negotiate
As weeks pass and the bill goes unpaid, your customers may provide reasons why the money isn’t turning up. Think about what happened to so many businesses in 2020 during the COVID-19 crisis. Many small businesses who were already trying to keep their heads above water were really struggling. Paying off a service bill is just often not their top priority.
But odds are you’re a small business, too.
Offer to work with customers who are in dire straits. This requires you to be able to put aside your emotions for a time. Maybe the customer can’t pay in full, or even in half, but they might be able to start paying in weekly or monthly installments.
Your goal in all this is to get paid for the work you performed. Yes, it would be better if your customer could pay you upfront (or at least within your terms), but if an installment payment will finally move that money from accounts receivable to your shop’s bank account, go for it.
Let someone else deal with it
Dealing with accounts receivable can take up a lot of time and energy. Maybe you’ve got someone who deals with it; maybe it falls on your techs, your managers, or even you. Even if you’ve got a group of great customers, there’s a particular type of stress that comes with trying to collect money.
You’re a repair shop. You should be focused on maintenance and repairs and getting vehicles back to work. You very likely don’t have the time or energy to go chasing after customers.
There’s another, easier option: let someone else deal with it. Interstate Billing Services specializes in accounts receivable management. That means they deal with chasing down the money while you can focus on your actual work. By outsourcing this area, you’re also preserving the shop/customer relationship. Your shop just handles repairs now. If your accounts receivable management does have to remind a customer to pay up, it’s still not your shop doing the reminding.
That can make an absolute world of difference.
Fullbay and Interstate Billing Service to the Rescue
If your shop is already powered by Fullbay, you’ve got direct access to Interstate Billing Service. Just jump onto Fullbay Connect and you’ll be able to send customer invoices directly to Interstate Billing Service from within the app. They’ll pay you for the value of the service, and your customer will communicate with IBS instead of you when the time comes for them to pay up.
Yes, you can get the money that’s owed you without damaging customer relationships – and you can keep your peace of mind while you’re at it.