Anecdotally, wholesalers tell us the 90-day overdue columns in their accounts receivables are bursting. This, despite standard payment terms at Net 30 or Net 45 days. Given that Australian wholesalers provide employment for around 550,000 people (ABS, Retail and Wholesale Industries, 2012-13), can wholesale businesses really afford to have their cash locked away by late paying debtors?
So what’s causing late payments for wholesalers? And what can wholesalers do about the debt management problems suffocating their cash flow?
1. Industry norms
Each industry will experience its own ups and downs in relation to what’s happening globally, as well as locally (some industries will react negatively to a change in government, for example). However, if economic growth, interest rates and inflation remain favourable for an extended period of time—all of which suggest good business conditions—and payment times are still late, the late payments culture of your industry may be more embedded than you think.
Understand the often unspoken ‘rules’ in your industry. You may learn that you always need to send two or three reminders before your invoice is paid. Have a system in place to send those reminders consistently and on time. Reduce the time between reminders and send reminders using multiple methods (e.g. email, SMS, post) to increase the probability of reaching your overdue customer.
2. Cash-poor customers
If your customer is cash-strapped, it’s likely their business will start accruing creditors as it fails to meet its debts. Your invoice may become one of many that are piling up.
– Reduce the credit limit (if they default or pay late, you’re not losing as much cash from your business).
– Shorten payment times (this way you can start chasing payment sooner).
– Request cash on delivery.
– Innovate your payments model with deposits, progress payments, penalties for late payments.
– Receive credit monitoring alerts so you can respond quickly to adverse credit findings.
– Be prepared to stop supply.
3. Big company muscle
The big end of town seems to have a lot of power when it comes to payments. They might set seemingly unfair long payment terms to start with. Your shared customers might pay them first because they are considered a ‘big account’ and therefore, valuable. From ezyCollect users, we can see that large invoices (over $20,000) typically carry longer payment terms and on average, our SMEs are owed at least $100,000 from large invoices alone. It’s easy to feel powerless in the face of the corporate giants, especially if they are offering you a deal you think you can’t afford to walk away from.
Implement big business methodologies to level the playing field. Automation will help you streamline a number of your systems so you are running your business with data, improved processes and heightened productivity. In automated debtor management, for example, mapping and tracking of accounts receivables gives you deep data and a clear payments history so you can communicate with your customer with confidence, and system-generated reminders keep your invoices on top of the large pile of creditors to be paid.
And don’t underestimate the value in your business: it’s in your customer service, company reputation, branding, even your social media influence. Build this value and you’ll have more respect from your big business customer, which should filter into how they treat your invoices.
4. Incomplete credit risk assessments
Historically, wholesalers take positive trade referrals as the only assurance of a new customer’s solid payments history. However, that approach won’t provide a comprehensive credit risk assessment to protect your business from late or default payments.
Before offering credit to a new customer, undertake a few checks that will provide some insight into your new customer’s credit history:
– An Australian Business Number (ABN) check is simple and free (do an online search for ‘ABN check’ and use a reputable agency). The ABN checks allows you to verify basic information supplied to you by your customer, such as their trading status and business address.
– Order a business credit report. You can purchase reports from national credit reporting bureaus that use their unique intellectual property to produce reports for low, medium and high risk business decisions. (ezyCollect users can order a subscription-free report from within the system). Choose a credit report that will give you information about a business’ payment history (including default and late payments) and the likelihood of a future adverse credit event. Read more on why credit checks are important (and they are!) here.
– Request a variety of trade referrals. When asking your new customer for referrals from their other suppliers, ask for suppliers that share similar features to your business (such as size) and also ones that are different. This will give you feedback from a range of businesses and a wide perspective on how your customer works with suppliers. Don’t rely solely on trade referrals as there is the risk your customer will only supply you with referees from the top end of the satisfaction spectrum.
5. Clunky Invoices
Invoices that are difficult to deal with get sent to the bottom of the pile. For example, if a customer is more than one-click away from settling their account online or by credit card, expect delays. Invoices that don’t clearly set out the items purchased, purchase order (if required) dates or other necessary information can all be queried, and that chews up time.
– Follow best practice invoicing methodology so your invoices are clear and easy to understand.
– Add online payments to your collection methods, so your customer doesn’t need to dig out a cheque book in order to pay you.
– If your customer is overdue on a number of invoices, collate them into one overdue statement so the total owing is clear.
– Teach your customer how you expect your overdue invoices to be treated i.e. with consistent consequences for non-payment.
To see how ezyCollect can fix the debt management problems in your wholesale business, book a demo today.