Every economic downturn is marked by extended receivables collection. More businesses need to rely on their vendors, suppliers, and contractors to finance the increased time and effort required to collect their receivables - this creates a significant tightening of cash flow through and entire supply chain in each industry.
The tightening credit markets have only accentuated the problem as most businesses are not able to rely on traditional banks for to finance their working capital - which is defined as the difference between the time a business needs to pay its payables and the the time it takes to collects from its customers.
We subscribe to and teach the Pleasant Nuisance Theory. In its simplicity, it uses consistent yet pleasant messaging to be just annoying enough but pleasant and professional enough to ensure that we are first in line to receive any payments being sent by our customers. Here is more detail on how it works (we will assume that all customers in this example are invoices on a net 30 basis).
First, someone in the firm needs to fill the role of "pleasant nuisance." This individual needs to devote a specific amount of time every week to contacting customers that owe money. Sometimes 1 or 2 hours is all it takes. The entrepreneurs, founders, CEO, and anyone involved in sales and marketing should NEVER fill this role.
Second, the "pleasant nuisance" should contact every customer within 15 days of when the customer receives an invoice from the company. The call (yes, an actual phone call, which should not be confused with an email, text message, tweet, or status update on FaceBook) should go something like this: "Tammy, this is Steve with the XYZ Company. I wanted to thank you again for paying our last invoice so promptly. Also, I was calling to make sure that you received our invoice #15224 dated June 1st. Have you seen it yet?" If Tammy says yes, then respond with something like this: "Great. Thanks for confirming that. Do you have any questions or concerns with it?" If she says no, then say something like this: "Oh, I would have thought you would have it by now. May I email or fax it to you right now?"
The third step comes with a phone call within about 1-10 of the invoices due date. The call may go someting like this: "Tammy, this is Steve from XYZ Company. We discussed invoice #15524 a little while ago and you were able to confirm receipt of that invoice with you at that time. Are there any concerns or hesitations with paying it by its due date next week, June 30th?"
I hope you can sense the pleasant part of this process. It isn't really much of a nuisance.
Fourth, if we call have not received the payment on the due date, we might have a phone call like this: "Tammy, this is Steve. Today is the due date for invoice #15224 and we have not yet received payment - we were expecting it today. Could you confirm that the payment has been issued to us? What date was the check mailed?"
If the customer does not confirm payment, then we step up our pleasant nuisance efforts by seeking commitments and then holding them to those commitments. Our leverage points may be finance charges, late fees, or termination of their credit terms altogether. We'll save those parts of the pleasant nuisance theory for a future blog post.
Conclusion - you will be surprised that two things happen. First, you will start getting paid on-time and sometimes even early more often. Second, you will train the AP clerk or accountant at your customer to expect your follow-up and want to give you good news each time you call. You may even establish a good relationship with them!