On this episode of Future Of Business we are tackling invoice collections and scourge of long payment terms. Poor collection process and long payment terms crush a businesses cash flow and their ability to grow.
Did you know:
"1 in 5 invoices to ASX200 companies are outstanding longer than 30 days!"
"A one day reduction in debtor days was worth an additional $18,000 in the bank for your average SME!"
We are excited to have on the show business guru - Rachel White, CEO of CFO For Rent - to help us understand the impact of poor collections on a businesses cash flow, but more importantly discuss simple tips and technology to get your small business paid faster. Have the notepad at the ready, this episode is full of some super useful information!
Don't feel like watching the full video interview? Refer below for each chapter and the scripts.
Alistair Lamond: Welcome to another episode of The Future of Business, proudly brought to you by Skippr Cash Flow. I'm your host Alistair Lamond. Today we're going to be talking about invoice collections and the scourge of long payment terms for an SME. No better person to advise on this issue than Rachel White, who's the CEO of CFO For Rent. She's a business mentor and a certified CPA accountant. Rachel, welcome to the show.
Rachel White: Lovely to be here, thank you Alistair.
Chapter 1: The Impact of slow collections (0:54)
Rachel White: The actual underlying problem itself is reasonably straightforward as these things often are, whereas the solution is often more difficult. Let's talk about the problem to start with. The main problem is you invoice a customer now, they might pay you in 7 days, 30 days, 60 days, at some point out in the future. Most SME owners have either staff or contractors who need to get paid right now for the work that's been done to deliver that project. If you look at it from a timeline viewpoint, you've got money going out here earlier on and then money coming in later on. I have that sort of the wrong way around in terms of the way you're looking at it but the timing of those creates a real cash flow crunch because obviously money going out earlier and money coming back in later, you don't have to be a genius at math to know what that's going to do to your bank balance.
The problem itself is reasonably straightforward to understand. Why I think it catches so many business owners out and especially for those who've moved from being an employee to being a business owner, when you're an employee, your income is fixed. You have a certain amount of money coming in net pay after tax every month, it comes in on the 15th of the month or you may get paid fortnightly, it's very predictable. For business owners, when customers are paying you, all of a sudden the money coming in starts becoming very unpredictable. That's probably the thing I see catch more people out than anything else.
The actual solutions to this are more complex than the problem and a lot of it comes down to your market power in many respects compared to your customer, in terms of the terms you can negotiate with that customer. Whilst for many SME owners having big enterprise customers sounds fabulous and wonderful, they're not gonna go bankrupt on you, they're going to pay their bills, that's true, they're probably the worst culprits of paying at 90 days. Especially in the construction industry, they're particularly bad at it for that. Anyone who's a guy who's employing three other guys, he's caught between a rock and a hard place on that one.
Chapter 2: Collection tips - pre-invoice (3:22)
Rachel White: The pre-invoicing piece is pretty important up front to improve your negotiating position. The main thing you need to get it right up front, and this is something I talk about in my upcoming class around getting paid faster, the first thing you need to get right is your payment terms. This is the agreement you have with your customer when you invoice them. Is it during the project? Is it at the end of the project? Is it at the end of the month? If you have a monthly retainer-type model, it's the point in time you'll actually invoice the customer, how long they have to pay you so that's that number of days - 7 days, 30 days, 90 days, whatever it is.
There is then two other factors that most SME owners aren't aware of - that is late payment interest, so if the customer is late most contracts do have a late payment interest clause, which then gives you the legal ability to charge interest if they haven't paid. The other one you can use, especially if you've got decent margins in your product, is discount for early payments. I noticed AGL is starting to do this in their energy bills, you get a discount if you pay AGL on your electricity bill at home, so they're starting to use that now in terms of managing their own cash flow so this stuff applies to big companies as well as SMEs.
Alistair Lamond: What kind of discount would you be offering?
Rachel White: I think they're offering 2 or 3% so it's not huge but it's enough. That obviously comes off your margin so if you've billed $10,000 for a job, 2% is $200 so that starts eating into your margin. However, in terms of incenting customers to pay early, sometimes that makes a difference, sometimes it doesn't.
Chapter 3: Collection tips - Post Invoice (5:27)
Rachel White: Let's talk about the invoicing process itself because that's the second thing you need to get right up front. It's sending invoices out in a timely manner so when you finish a project, the invoice goes out that day or it could be that it goes out in advance so the customer's received it and if they've got queries or questions on the invoice, there's a chance to do that while you're still finishing the project.
"It's important to make sure that invoice date that starts the clock ticking on the due date is happening as fast as possible. That's actually probably a primary area of control."
Alistair Lamond: Make sure the customer is accountable for that invoice right away.
Rachel White: Yeah. In terms of tools and technology you can use to do that, FreshBooks is obviously a fairly frequent invoicing app that's used. A lot of the accounting packages have in-built invoicing, so if you're not sending out very many invoices a month those are quite good. I, in my own business at the moment use that personally. Xero is normally the foundation ledger app we're using. The customer interacts with it themselves, they know what the customer is buying, they know when the customer is meant to pay the money, so actually there's far more accountability around the process.
Effective invoice collection entails people, process and systems.
"In a sales organisation in particular and especially from an account manager viewpoint, your invoicing is part of the customer experience."
It staggers me the number of companies that just don't get that. You're actually sending them a document asking them for money. It's hard enough work at the front asking them for money and then towards the end of the process you're asking them for money again. This is not a finance, admin, back office process that minions do because it's not particularly valuating. Most clients I've worked with, the first thing we do is look at their invoicing process and one of the first things I do is bring it into the sales function because there's just far more accountability in terms of the quality of what goes out and when it goes out, from that viewpoint.
Alistair Lamond: It sounds like with the collection process, it needs to be managed with good relationships. What are some collections tools out there to assist with this process?
Rachel White: The collection piece is then after you've sent the invoice out. There's payment terms, there's invoicing and then there's collection tools. That's, I think, where the technology can probably help you the most. One of the other things we also do in most clients I walk into is we redesign their invoice. One of the biggest complaints about invoicing is they're really hard to read. Every Telco on Earth spends gazillions on their invoicing systems trying to make the invoice easier to read.
"They still struggle with it but it's something that every client I work with, one of the first things we do is redesign their invoices to make them easier to read."
The second thing we do is we send out statements at the end of the month or at a certain point in the month. A lot of it's just frequency of communication, so it could be we send out the invoices on the 3rd of the month and then the statements go out the 17th because it's just two weeks later. They're getting regular consistent communication from us that's not overwhelming to people that have very fully booked boxes. Those statements that go out then show all the invoices which are outstanding for that customer so it could be the last month's invoice plus the one before plus the special project and they can see how much they owe you in total. That's a good trick. There's then just the email follow-up.
Chapter 4: Collection processes (8:54)
Rachel White: There are some tools which are out there and again some of the accounting systems have them built-in, sometimes you can have an app you bolt on, I think GoDaddy is one.
Alistair Lamond: Debtor Daddy?
Rachel White: Debtor Daddy, I do apologise. Debtor Daddy, getting the apps mixed up in my head, there's so many of them. They have regular emails that can go out. This is one of those areas that technology hasn't quite cracked yet and you mentioned the word 'relationship' before Alistair and I think that's very relevant here. Nothing beats getting on the phone. Usually what happens is, if there's no response to the invoice and there's no response to the statement and also to no other piece of communication you send out, that's when you just need to get on the phone. Nothing beats that.
There's a lady I work with who is an absolute guru at this. She's actually a sales person, she's not a finance person and that's one of the reasons it works. She's also a dog with a bone. She's lovely about how she does it but she will not take no for an answer. When I walk into a client who has their receivables ledger that's looking a bit ugly, she's the person I call and I parachute her in there and she does her magic. She's old school and she basically gets on the phone and she talks to people. I've not yet seen technology ever replace that.
What technology can do is, for those who will pay once they've acknowledged that the debt is due who are horrified that they've paid late, for those people the technology works, the automatic communications work really well. For everyone else, this is old fashioned, get on the phone and talk to people stuff.
Chapter 5: How is the government helping? (12:14)
Rachel White: In terms of the government's focus on the SME sector, SMEs are the engine room of the economy down here. Those oligopolies that you mentioned before are all in deep danger of being disrupted, the government knows that from that viewpoint, so in terms of the growth of the economy, SMEs is where it's at, they know this. There are lots of programmes to help out SMEs so we're not running out of programmes in that respect. In terms of effectiveness, I think the UK tried that one. It's yet to be said how well that worked.
In saying that, voluntary compliance is always a lot cheaper for the government than legislated commands because then they've got to track it and measure it and then there's reporting and then there's the whole everyone screaming the House down at the cost of red tape and all the rest, which is fair enough. I think there was something a few years ago where large construction companies had to report how much they paid to suppliers and contractors by contract amount, they gave a number, which I'm not quite sure what the purpose of that was but it cost an absolute bomb. It's that sort of stuff. The government doesn't have a good track record in terms of having low cost compliance on those things, it is what it is. I think that's probably holding them back from the legislative component.
As we talked about before and for a lot of SME owners, there's the whole working with large enterprises, you think your ships come in, there's a certain starry-eyed element to it. If you work with the supermarkets, their entire model is based on 90 day payment terms and for the farmers in particular, that is a nightmare. I've heard more than one supplier, and that's why I try to talk about that stuff, they do it because of market power. They do it because they can. I'm sure that they ave probably signed up, whether they'll comply with it is a whole another story.
In the construction industry, which is also a big chunk of the ASX 200, it is just an industry thing that the master contract gets paid on 30 days. The sub-contractors get paid on 60 days, the product suppliers get paid on 75 days and it's just you can't get paid any faster in the building industry than that payment terms. I worked for a company that who was doing some automation software in the building industry and we tried, we really tried to get down to 45 days and it literally couldn't be done. Advertising agencies, 60 days is the norm in that space. I worked with a company that was disrupting that about four years ago and we were right bang in the cash flow cycle and it was the biggest cash flow crunch in that business model.
I think there's good intent, I can see where the government's come from in doing voluntary versus mandated and I get it. In terms of whether it will be effective or not, there's so many business models which are actually built around ... Going back to the supermarket model, the sexy department to work at in Wesfarmers is treasury because they basically get paid in 2 or 3 days and they pay their suppliers somewhere between 60 and 90. They're holding all that cash for that time, so if you're in treasury and you've got Wesfarmers on your resume, yeah that's very highly regarded because you're actually almost in one of the most strategical parts of that company in terms of their business model almost literally because they're holding cash for 60 to 90 days.
Thanks for tuning in!
Want more background on Rachel White and CFO for Rent? Check out Rachel's blog here!