Imagine putting hours of your time and hard work into a job and, at the end, being paid short, or late, or maybe not at all. I can feel the frustration and anger simply writing these words. Unfortunately, this is an all-too-common occurrence, but it’s a situation where an ounce of prevention is greater than a pound of cure.
Establishing and maintaining receivables and credit management best practices builds a solid prevention foundation. These best practices do not have to be as cumbersome as they sound. I asked some wood flooring professionals for their best practices related to receivables and credit management. The answers were helpful and relatable, and sometimes even funny. Like Jim Hyde from James A Hyde Hardwood Floors LLC in Marmora, New Jersey, who wrote in, “I stand outside their bedroom window at 5 a.m. and play the violin (and I don’t play violin) every day until paid in full.”
Read on for some actionable steps you can take.
Defining Receivables and Credit Management
Most people have an understanding of receivables. You get paid for a portion of your work up front and the balance at the end. This delayed payment is a receivable, something that is owed to you after work is completed. This presents a form of risk. What if they don’t pay? Writing off that bad debt results in a negative impact on your bottom line.
That is where credit management comes into the picture. Remember back to when you applied for your last credit card. The credit card company simply takes your word and gives you the card, right? Of course not. They want as many details on your history as possible and scrutinize everything to a level many people think is excessive. That is the credit card company’s credit management process. I am not suggesting that you put all of your customers through that type of process; that would likely cause more damage than good, but there are some actions you can take to develop an effective credit management process. Even a small amount of time spent maintaining those processes should yield benefits and is less stressful than time spent chasing money.
Where do I start?
Begin with the right mindset. How much loss can you tolerate? The gut reaction tends to be, “None!” but that isn’t realistic. Even companies with the best customer relationships will come across a situation where they aren’t paid from time to time. NWFA member Nemo Cockrell of Nemo’s Hardwood Floor Company in Oklahoma City shared a story about a nonprofit customer that lost funding during a large job. Luckily in this situation, the nonprofit was able to make it right 10 months later. But life is messy, these things happen, and it is important to accept that.
Next, calculate your accounts receivable turnover ratio. Accounts receivable turnover is the number of times per year that a business collects its average accounts receivable. If you have never calculated this before, then you can start by looking at the calculation for 2016. Add your beginning accounts receivables on Jan. 1, 2016, and your ending receivables balance on Dec. 31, 2016. Then divide the sum by two to get your average for 2016. Next, divide that number into your annual credit sales. The result is your accounts receivable turnover. The higher the result, the faster you can collect on receivables. This is a good benchmark to start with to compare against later and see if your efforts in credit management are making a difference to your financial results. See below for
ABC Wood Floors is owed $25,000 from all its customers Jan. 1, 2016. They are owed $60,000 Dec. 31, 2016. Their average accounts receivable turnover is $42,500 ($25,000 + $60,000 = $85,000 ÷ 2 = $42,500). You could get a more accurate number for average accounts receivable by taking the amount owed at the end of each month and divide by 12.
Sales made on credit for the year were $385,000. Divide $385,000 by $42,500. ABC’s accounts receivable turnover is just over nine ($385,000 ÷ $42,500 = 9.06). This means that their accounts receivable turn over nine times in the year. If you divide 365 days in a year by nine, then you can say that ABC collects credit sales in about 41 days (365 ÷ 9 = 40.55).
Once you know these numbers for your company, you can calculate them again over time to compare and see how much your ratio is improving.
Use the right tools
- Utilize mobile payment processors like Square or PayPal. You can collect on
site and link to an accounting software like QuickBooks.
- Use early pay discounts if the value is there. The cost can outweigh their benefit.
- Get a signed contract from the customer.
Delight your customer
- Dennis Prieur of Through The Woods Fine Wood Floors Inc. in Tampa, Florida, says, “Delight! We have found that the delighted homeowner is prompt to pay for the floor and the wonderful experience.”
- Provide quality service and follow-through at all levels, and word-of-mouth will lead to higher quality customers.
Work on relationship building
- Josh Jacobsmeier of Jacobsmeier Floors, LLC in Mount Pleasant, Iowa, shared, “Show up to the house and make sure they were happy with the product and installation. Try to establish a line of communication and friendship.”
- If people like you, they will be more likely to pay and be a less difficult customer overall.
Be clear, concise, and confident
- Cash Pyle of Pyle Legacy Floors in Modesto, California, has his customers sign a contract that includes a late fee charge of 18 percent interest that cycles in 30 days. He says, “When it approaches the overdue date, I send a kind reminder and include the cost of being late. Usually, the check is received the next day.”
- Try to keep emotions out of it. This is hard to do when you are owed money.
- Richard Goering of Bona US in Aurora, Colorado, says it best: “Communicate, communicate, communicate!”
- Andrew Douglas of Modern Tech Wood Floors in Portland, Oregon, says, “Make it very clear when the payments are expected.”
- “Don’t allow them to get past due. Set expectations with your customers that the remainder of the balance is due when the job is complete, and someone should be there for a final walk through and payment. Circumstances change, but if you set the expectation early and often, then it will never be an issue,” says Michael Akins of JW Floor Coverings in Angier, North Carolina.
- Ask the customer at the beginning what they expect from you to make it a successful transaction. Then show them throughout the process how you have delivered on those expectations.
Sometimes you have to get really serious
- Know when to give up. Don’t use good money to chase bad money.
- Will Carlson of Gulf Coast Hardwood Floors, in Fort Myers, Florida, shares, “If worse comes to worst and you still haven’t been able to collect, putting a lien on the residence usually works pretty quickly.”
- Keith Verdin of Nature’s Hardwood Flooring in Pleasanton, California, emphasized the importance of knowing how to choose the right clients and says, “Burn me once, shame on you. Burn me twice, shame on me.”
Some of these action steps may seem obvious, but it is easy to relax and let it slide. If you are loose about terms, it opens the customer up to being loose about payment. Remember to be the person you want others to be to you. Act like the professional that you are and provide respect and quality service. Your integrity will provide you greater returns than anything else.
Bree Urech-Boyle is Chief Financial Officer at the National Wood Flooring Association in St. Louis. She can be reached at firstname.lastname@example.org.