There could be a number of reasons for this:
- Invoices have not been submitted to the customer timeously and have missed cut-off dates – and the customer is an inflexible big business.
- The customer is experiencing financial difficulties.
- The customer is one of those businesses that always delays paying as long as possible even if they have the money available.
- Not demanding payment because staff are not comfortable doing that.
Regarding 1. above it is important to ensure that all debtor related activities i.e. prompt invoicing, issuing of credit notes and statements are extremely well run.
If a customer is experiencing financial difficulties this could be a big problem. A large amount not received could have the effect of crippling your cash flow. If this results in not being able to make payments your business could end up getting a bad name. Your customers will get to hear about this. If the products you sell require the honouring of warranties or ongoing support you may lose sales.
It may also be that the amount you do not receive has the effect of putting you out of business.
Choose your customers carefully. Don’t just chase sales. Remember the old saying, “A sale is not a sale until you have the money in your bank.” Relying on reports from credit bureaus is not enough. If the amount of any sale is large then make enquiries of your own. Visit the customer to get a feel for the business. Speak to people in your network and find out if they know of anything negative about the customer.
Be the Wheel that Squeaks the Loudest.
People are often reluctant to ask for money is due to them because they fear that annoying the customer will lose them future sales to the customer. Ask yourself whether a customer who is a potential threat to your cash flow (or your entire business) is worth having.
Will you lose business? Not necessarily. I was once assisting a client prepare a cash flow forecast (this was something they had never done before - which explained why they had not anticipated the cash flow problems they were experiencing) and needed information about the timing of payments. I gave a list of the amounts owing to the owner asking him to indicate with an ‘A’ those creditors that absolutely had to be paid by the month end, to indicate with a ‘B’ those that could be delayed for a week and with a ‘C’ those that could safely be rolled for a month. When examining the annotated list I was surprised to see that he had marked a very large amount with an ‘A’. I was surprised because the product being bought was a commodity that was available for a number of suppliers and so I felt that their payment could be delayed. When I queried this with someone in the creditors department that person smiled and told me that on the 25th of every a woman from that business called the owner and told him that a driver was on his way to collect a cheque. I must have looked puzzled because I was told, “He’s scared of her.” She was the ‘wheel that squeaked the loudest’ but he kept buying from them.
Don’t prejudice the survival of your business for any of the reasons I have stated above.
Assets & Profits are like food to humans. We can live without food for a long time. We can’t live without oxygen. Cash flow is the oxygen of a business. It stops, the business dies.