I remember seeing a catchy title many years ago on a business book. I checked Google and found the exact title was Buy Low, Sell High, Collect Early and Pay Late. The Manager’s Guide to Financial Survival. The author is D Levin and the book was published in 1983 by Prentice Hall Trade.
I have not read the book but I have seen the title before. Now it is obvious that to make a gross profit, you should sell high and buy low. However, this is only half of the reason for success in business. The next thing you need is sales volume. This is why some businesses buy low and also sell low in order to get good sales volume. A really successful business has high margins and high sales volumes but you can be successful with just one of these.
The next phrase relates to cash flow. Ideally, you want to rely totally on your sales to give you a positive cashflow. In reality, though, most businesses rely on startup capital or borrowed money to cover their cashflow. This is especially so if your business requires investment in substantial capital equipment.
Let’s examine the second statement, “collect early and pay late”. In practical terms, this means you should collect money from your customers in say, seven days and pay your clients in say, 90 days. If you have this arrangement and your clients and suppliers are agreeable, then all I can say is congratulations. You certainly have no excuse for cashflow problems if this is the case.
Now, every invoice has a customer and a supplier involved. So on average, all businesses throughout the world will pay and collect at the same time. Obviously, some businesses are paying their suppliers before their customers are paying them and vice versa.
This brings me to a well-known saying in the Bible. “Do unto others as you would have them do unto you.” In credit terms, this means how you can you expect your customers to pay you on time, if you do not pay your suppliers on time. Quite frankly, I disagree with Levin’s premise, “Collect Early and Pay Late”. I think it is immoral.
So what is the answer?
I believe you do whatever it takes to get a sale. Selling is where the money is. You should always employ many more people and spend many more hours on marketing than you do on credit. The credit function is merely there to assist the sales process. If it was not needed, then it would not be used. Many successfully businesses collect all of their money upfront so they do not need a credit function at all.
These include retailers, online businesses, business coaches and more.
Offering credit facilities is all about giving yourself a competitive advantage wherever possible and making life as easy as possible for your clients. Make it easy, and more importantly, pleasurable to do business with you. This may or may not include offering credit facilities. The more generous your credit terms, the greater the benefit to your customers.
Here are the two secrets to account collection.
- Create a situation where your clients want to and are able to pay you early.
- Treat each customer separately. Not all customers and situations are the same.
Here is my philosophy on trading terms and collecting money.
- Offer our customers 30 day terms.
- When payment is overdue, use regular yet polite reminders.
- Do not use the telephone until you have made at least one other form of communication. Mostly, we use three written forms of communication, i.e. statements with stickers of increasing severity.
- Only threaten legal action as a last resort.
- When you do threaten legal action, carry out the threat.
- Offer multiple payment methods, i.e. MasterCard, Visa and American Express (with no fees) Direct Deposit, Cheque and Cash (for local customers only).
- Two of our websites allow for upfront credit card payments but also offer facilities to be invoiced.
- New customers can obtain credit by completing a credit application form. We save time by allowing credit for very small orders.
- All credit applications are treated separately. Large listed companies will be granted credit automatically. Individuals such as those requesting wine labels for a wedding will pay upfront.
- We request a 50% deposit for some very large orders.
The important thing is that even though our credit terms are generous and lenient, this is counterbalanced by the fact that many customers pay upfront with their orders. The advent of the credit card and direct bank transfers has made life much easier for the credit manager.
Here is my philosophy on accounts payable.
- All accounts are paid on or before the due date.
- Often, smaller accounts are paid early.
- Some businesses who really look after us well get paid immediately.
- If there is a cashflow issue for a particular month, I ring my largest supplier and ask permission for extended trading terms.
- Pay accounts by credit card if available and there are no fees. The second option is to pay by direct deposit.
The important thing here is to be efficient. By getting accounts paid quickly and entered into MYOB, we do not get distracted by more important matters, i.e. customer service and marketing.
Also, I pay by credit card whenever possible to extend my credit terms and build up my frequent flyer points.
This philosophy means that I am one of the businesses that collects late and pays early. However, this is somewhat negated because we do receive a lot of customers paying with their order. Also, our efficient accounts receivable procedures mean that overdue accounts do not stay that way very long.
Source: SmallBIZTips – September 2010 Volume 3 Issue 21