An insidious form of theft takes place every day. It can cause a business to die. It causes no end of anguish to electrical firms and others who sell services and equipment.
If you work for an electrical services firm, take a look at the side of one of your trucks. Where on that truck does it say “Free long-term loans to all customers”? Can’t find it?
Maybe it’s there, just written in invisible ink. Many firms struggle with overdue invoices. It’s as if many customers think the firms double as banks specializing in interest-free loans with generous terms.
How bad can it get?
It can get really bad. Consider the case of Ed, who owned a four-person shop. They got a big job that required electrical testing in a shutdown mode. The customer had decided “at the 11th hour” to take advantage of a Thanksgiving shutdown. Ed and his team worked overtime from early November through mid-December to get the job done. Ed rented equipment, paid salaries, and had other expenses.
The customer wanted the invoice submitted no later than Nov. 15. Ed assumed this meant payment would come before Christmas, and made the terms Net30.
But that payment did not come in December.
Because Ed's firm was on an accrual basis, he had to declare the revenue for the invoice year. Because Ed’s firm was a Subchapter S, its federal income taxes were due the following March. He had to obtain a high-interest loan to pay those taxes, because his customer still had not paid him. Finally, in August, the customer paid the bill.
For any firm, the results of unilaterally imposed banking arrangements can be catastrophic. Take the case of the Truland Group. This 100-year-old company was liquidated via bankruptcy. Why? Overdue invoices from one customer greatly exceeded the company’s combined debts and liquid assets.
Stop the stealing
Slow-paying customers rarely consider their behavior to be stealing. The last thing you want to do is to accuse them of doing anything wrong. You can take measures to square up accounts, but take measures like these to reduce the need:
- Be diverse. This helped Ed survive. Don’t rely on one big customer. The bigger one job is in relation to your other revenue, the riskier it is.
- Use a tight net. As Ed discovered, Net30 often gets translated into 30 weeks instead of 30 days. These terms are so often abused that they can serve as code for “Pay when you feel like it.” Use shorter terms, such as Net20. Then be gracious when these are a little late.
- Communicate clearly. Don’t stipulate a due date from something other than an exact calendar date. State that payment is due 20 days from the invoice date. Submit the invoice the same day work is completed; this promptness signals that you also expect prompt payment.
- Invoice in small chunks. Rather than send one big invoice when the project is done (and the customer no longer needs you), invoice at milestones throughout the project.
- Track payment flow. If one invoice is late, don’t let it slide. If you do, the next one will be even later. Immediately ask the customer to “help me resolve this problem.”
- Don’t be afraid to quit. If invoices go unpaid past your predetermined threshold, give the customer a one-week notice. If no payment is in your hands, quit the job and hire an attorney to help you negotiate collecting what’s due. The attorney should also review the contract. It should be voidable by you if payments are late; of course, you made sure to insert that language into the contract to begin with, right?
Collecting the overdue
- Be polite, but firm. Ask for help rather than insist on action. “Can you please look into the problem with this invoice? Thanks!”
- Express regret. Tell the customer, “I’m really sorry that we may have to stop working for you. We’ve taken great pride in what we’ve done thus far and would like to complete the job. Can you help us do that?”
- Offer a small discount. “Just to show how pleased we’d be if you get this overdue invoice paid by Friday, we’ll knock 5% off the next one if you pay it timely.” Be clear that this is a one-time accommodation.
As you interact with various customers in your market, take note of payment attitudes and behaviors. Talk strategy with your team to best determine how to align your billing practices with your cash-flow needs. And don’t be afraid to fire bad customers.