The scenario is all too familiar.
Jim, a rising sales star at a company we’ll call LTI, has just closed his biggest deal yet, a contract to design, build and install computer circuit boards for an up-and-coming commercial alarm systems company we’ll call S.A.F.E. Security Systems. In the excitement of the big win, S.A.F.E.’s credit application is tossed in a file and forgotten.
The next six weeks are a flurry of activity to meet S.A.F.E.’s deadline. A week after delivery, Jim makes a follow up call. The customer is more than satisfied. Jim makes no mention of payment; he doesn’t want to appear impatient or distrustful.
At 45 days, Jim makes a friendly reminder call. Sorry, the paperwork got tied up in accounting. Payment will be expedited.
Sixty days go by. Jim doesn’t want to strain his relationship by making debt collection calls. Besides, debt collection is not his job. So the credit manager calls. This time, the customer admits to a minor cash flow issue. Nothing to worry about; it will be resolved in a week.
Sixty days stretch into 90. When called again, the customer brings up quality issues he’s never mentioned before. The invoice is just going to have to be adjusted, he says. Only then is it painfully obvious that it’s time to call a debt collection agency.
LTI has committed every blunder in the book to practically ensure non-payment. Here are their biggest mistakes – and how you can avoid them.
Sloppy credit practices or too-easy credit.
Let’s face it: Enterprises are started – and for the most part, run – by sales people, not credit people. And we all know sales people who will do anything to close a deal. That may even include extending credit on little more than blind faith.
Oh, they’ll have the prospect fill out a credit application. But amazingly, the so-called credit review process often stops right there. Credit references aren’t even called!
LTI needs a clearly defined credit policy; complete with step-by-step credit review and debt collections procedures. These must be hammered out in the cold light of day, free of the emotion-charged environment of a major sale hanging in the balance. LTI should outline precise follow-up procedures, including when to call and even what to say.
LTI should have an established relationship with a professional debt collection agency to handle their unresolved debt collections. Remember, all debt collection agencies are not equal. A reputable debt collection agency can not only be an effective resource, it can serve as a reliable and important extension of your internal debt collections process and effort.
Conflict between sales and credit: “It’s not my job.”
Sales people are successful because they get people to say “yes.” Credit people just seem to want to say “no.” That’s the crux of the conflict. An appeal to the president produces predictable results: Coming from a sales background, he or she inevitably sides with sales – at least until the company’s been burned a few times.
LTI needs to make debt collections part of every sales person’s job. Commissions and bonuses should be tied to actual payments received rather than orders taken. Sales people need training in how to ask for payment directly and courteously (their commission depends on it!) and spot trouble early.
Sales and debt collections can even work together in a “good cop, bad cop” tag team. (“I know you just got the invoice, but those guys in credit are after me to give them an estimated date of payment.”)
Fear of asking for payment.
Money can be an uncomfortable topic, even for a sales professional. So Jim waits too long to bring the subject up.
A clear follow-up procedure – complete with scripting and target dates for follow-up calls – is a surprisingly easy solution. Making sure it actually happens is the bigger challenge. LTI needs to build in a reporting mechanism to ensure it does.
When the invoice goes out, Jim should call promptly to confirm that it was received and ask if there are any questions. He adds simply, “So you don’t foresee any problems meeting the 30 day payment terms in the contract?” Payment is just another business matter and can be openly discussed in a direct, non-threatening manner.
Allowing yourself to be taken advantage of or lied to.
LTI is letting itself be taken advantage of. Even when S.A.F.E. has obviously lied, LTI doesn’t call their bluff.
In our experience, companies are slow to pay their bills for three reasons.
A. Human error or sloppy payment procedures. A simple follow-up call makes your invoice a priority.
B. They have cash flow problems, and they’re buying time from you to pay more critical services that keep them in business day to day. Next priority are suppliers who are most proactive in requesting payment. It’s the squeaky wheel syndrome. So be sure to squeak.
C. They are unethical and, frankly, trying to rip you off. These businesses have no intention of paying unless you dramatically cut the invoice or take them to court.
Waiting too long to call a debt collection agency.
Once S.A.F.E.’s account became 60 days past due, the chances that LTI would ever collect on it were 85 percent. At 90 days past due, the likelihood dropped to 73 percent, then to 57 percent at six months. If LTI hires a professional debt collection agency, those percentages will increase dramatically – close to 100 percent in many cases. Without it, the likelihood of payment will just continue to drop off. By nine months, it will be a miserable 42 percent.