Credit Terms: Would Your Business Suffer If You Changed To 7 Days?

August 8, 2011

by Justine Parsons
Credit Terms: Would Your Business Suffer If You Changed To 7 Days?I raised the following comment on Linkedin and thought these responses worth sharing.  With the much talked about US economy problems and volatile share market, now is definitely a time to tighten your credit control procedures.
 
Attending a talk last night given by one of the BNZ business managers (and thanks Andrea at Ochre Business for the quality of your course) and one thing he said which jumped out at me was that NZ, unlike the rest of the world, insists on using the 30 day credit account.

We discussed the pros and cons of offering customers terms, quality of customers lost in moving accounts to 7 days, reduced risk to business … all of which has me thinking.
 
I do credit control for a number of clients and see the cash flow problems created by accounts tied up in overdues, some debtors (not all) show a complete lack of appreciation or loyalty to the business trying to work with the debtor to reduce said debt, and wonder whether the balance of making sales against credit risk is a risk worth taking.
 
With businesses both large and small still failing as we ride through these unstable times, do you offer your customers credit terms. If so, would you change to 7 days?
 
 
Chris Griffiths • ” I raised this very issue yesterday on the NZ Business Mentors forum with no response.

A new client came to us after a disappointing experience with a competitor. We completed the work for them and sent an invoice, which stated that payment was due in 7 days, and to contact us if there was a problem.

After waiting a month for payment I contacted them, they apologised and paid the next day. Soon afterwards they contacted me saying THEIR terms were to pay invoices on the 20th of the following month. For example if we invoiced them on 1 August they will not pay us until 20 September.

I’m not quite sure how to handle this. The client will potentially be good business for us in the future but this means that at the very least I will always be unpaid for a minimum three weeks, up to a possible maximum 6-7 week delay. Some of the work I do for them involves us having to pay for goods & services and we settle our own invoice within a day or two of receiving them because we think we should pay promptly for services rendered.

My initial feeling is to begin charging this client more for the work we do, to take account of the fact that they are essentially demanding free credit for 3-7 weeks.

In this era of Internet banking and e-mail having for the a large part replaced cheques and posted invoices there is really no good reason to offer more than 7 days credit.

Twenty years ago when you went to the dentist he sent you an invoice when all the treatment was completed, now you are expected to pay before you leave the surgery after each visit, not at the conclusion of the treatment.”

 
 
Stuart Duncan • ” Hi Chris and Justine

An interesting dilemma. For a left field answer, how about letting the customer chose when they want to pay?

By that, I mean have (say) 3 options, all with a different price attached. Assume that you would normally charge a customer $1000 for the job you have done, expecting them to pay on the 20th of next month. There are 2 slightly different strategies you could employ, depending on the relative bargaining power between the 2 parties – a variation on the age old “carrot and stick” principle.

Strategy one: You could offer terms such as: Invoice total is $900 if you pay in 7 days, $950 if you pay by the end of this month, and $1000 if you pay by 20th of next month. (By putting an actual value rather than a % discount on the invoice, you are more likely to gain the attention of the recipient)

Strategy two: You could offer terms such as: Invoice total is $1000 if you pay in 7 days, $1050 if you pay by the end of this month, and $1100 if you pay by 20th of next month. (Again, an actual dollar value is more likely to gain the reader’s attention)

Then your client can chose when they want to pay, depending on their own cash flow situation, but recognising that there is a cost (either real or opportunity) by delaying payment.
The other critical element of this strategy is that any overdue accounts MUST be followed up immediately after the final date for payment is passed. There is little point in offering a discount or tiered pricing if you are going to ignore the “cost” of debtors not paying you after the 20th of the following month.

Depending on your business, one strategy may work better than the other. So experiment with both for a couple of months and see what happens (use one strategy on half your debtors for a couple of months, and the other strategy on the other half, or select subsets of your debtors to run each strategy in parallel and measure the results to find out which one works best) The worst that can happen is that everyone still pays on the 20th and things are no different than you started. But if even one debtor takes up your offer, you have improved your cash flow and reduced your working capital requirement.

You can experiment with the discount amounts or the amounts added for payment over 7 days, depending on your business, but the principle is clear.”

 
 
Louise Allnutt “When we started our business 10 years ago, we set our terms at 7 days as we were only small and cash flow was key. Over the years we have only moved a handful of clients to 20th of the month and that was mainly because they were ordering a number of times a month and the 7 day account was making more work for their accounts departments. On the whole, the bulk of our clients do pay within 10 days and it allows us the option to chase an outstanding account soon, particularly larger bills. We know that our invoices are sometimes caught up with the rest of the 20th of the month payments and we don’t tend to chase the smaller ones. Sometimes our clients come back to us with “their terms” and that’s fine as we’re still getting the bulk at 7 days.”
Justine Tatt Thank you for your comments, your advice being so relevant for small business (and larger companies) that I have blogged this discussion.

Your strategies Stuart really started me thinking of possibilities. By giving customers the power of choice you are both offering them added value in terms of monetary benefits while rising above your competitors with the choice of terms. By giving them the power to chose their own terms you also negate the risk of offending and thus losing customers, minimising possible damage to your own company.

 
Susan Handisides On the cash flow topic I have noticed that there are some small businesses who take their time in invoicing. As we know cash is king (or queen) and we have to invoice to get paid. So invoice as early as you can. Sounds common sense but we all know that common sense is not always that common!

 

 
Chris Patterson The objective is to get paid for the services or goods that you provide. Changing to seven day terms can be one step in the right direction. After a decade of running my own practice I decided to make my invoices payable on receipt. The rationale was quite simple. My clients had already had the benefit of my services by the time they received my fee note. In some instances they may have had that benefit for several weeks. I also thought that if it is good enough for my dentist to require payment before I leave his office then why could I not adopt the same process.

However, this topic raises a wider and larger issue. Converting a trade debt into money in the bank requires a thought out process and adherence to that process. The period of credit is one part of that process. Other key parts include the mode and frequency of requesting payment, when to cut off a clientcustomer and when to engage outside assistance (debt collector and/or lawyers).

I have seen scores of businesses fail simply because they were too focused on other aspects of their business and let their accounts receivable get out of control. The Construction Contracts Act is a good example of where the Government had to step in to assist a very ill industry to improve its ability to recover trade debts and be paid on time. Unfortunately, the rest of the economy does not have the same protections.

I am presenting a free webinar tomorrow night titled “Enforcing Judgments – From Judgment to Practical Result”. I will be disclosing the secrets of how to convert a judgment into cash in the bank. Registration for the Webinar can be found at: https://www3.gotomeeting.com/register/207737478

Please feel free to pass on to anyone you know who may be interested. CP

 

Join the discussion with your comments below or on Linkedin

 

 

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