“I have noticed that the people who are late are often so much jollier than the people who have to wait for them.” E. V. Lucas.
Most accounts receivable professionals would agree with that statement.
Every late payment has a cost to a business. So much time can be wasted chasing down payments, sending reminders, listening to explanations and excuses, and, perhaps most costly of all, watching client relationships crumble. Not to mention, it’s a right pain in the ARse (that’s a little joke for all you accounts receivable professionals out there).
The best accounts receivable professionals have a finely tuned skill set that combines financial nous and sales know-how. What we’re talking about here is the unique ability to bring home the bacon whilst ensuring the customer relationship remains intact (future bacon). These kinds of accounts receivable professionals are a rarity and that skill set is made complete due to their time in the trenches and gut instincts. They understand debtors, know how to speak to them and can potentially save a company millions.
The credit control industry will tell you that it’s unprofessional for business owners or salespeople to follow up on late payments, stating that there should be a clear separation between sales and accounts receivable. But, of course, tell that to the owner of an SMB and see how helpful that is when they are both sales and accounts receivable, and ultimately the ground zero manager of finances.
And there it is, strangely: Late payments are considered a financial issue for businesses, when in fact, they are often an indicator of deeper problems. Whether they are product, operational or customer service related, the best accounts receivable professionals understand the cause and effect relationships of late payments.
But what about SMBs? Where are they to get the insights to effectively manage their finances? The answer is data. They need data on the cause and effects of both prompt and late payments.
What makes a prompt payer?
Before you run wild looking for what causes those late payments, it pays to delve into the positive and assess what creates a prompt payment.
We surveyed over 150 people from small to medium-sized businesses to find out more about what makes them pay late and pay on time.
Our survey highlighted two key points you should always keep in mind, especially if your customers are small businesses:
- It’s often the business owner themselves that pay the bills – that’s right, busy old Joe Bloggs
- Most businesses prefer to receive invoices, statements and reminders electronically via email – paper be damned!
We then asked our survey respondents to rate the factors that were most important when it comes to paying their bills on time. The top three were:
- Feeling satisfied with the product/service
- Receiving the invoice electronically
- Receiving the invoice promptly
So, there you go, Joe Bloggs wants to be satisfied with the products and services you’ve provided and wants his invoices delivered promptly and electronically. That’s not a big ask, is it? Ignore Joe at your own peril.
Things like credit card payment options, prompt payment discounts and sending reminders before the due date were also listed as factors that might increase your chances of getting paid on time.
I think accounts receivable professionals need to remember Joe Bloggs from the SMB isn’t an entire department, he’s, well, he’s just Joe Bloggs. Try to think of all the different ways you can make Joe’s life easier to pay you on time.
Writer and philosopher, Leo Tolstoy, said: “Happy families are all alike; every unhappy family is unhappy in its own way.”
Perhaps we’ll see the same principle at work with late payers.
What makes a late payer?
So, what makes someone pay their bills late then? I’m sure you have your theories depending on how jolly you are.
To be a prompt payer there are a quite a few things that need to line up, e.g. good products and services, invoice received promptly and electronically, an invoice is due on the right day of the month and there has to be money available to pay it.
The failure of just one of these steps can lead to a late payment. Thus, there are more reasons for a person to be a late payer than a prompt payer.
Let’s have a look at the top seven reasons SMBs pay their bills late:
- Lack of cash – I couldn’t afford to pay (44%)
- The invoice due date was not aligned with the day I usually pay my bills (36%)
- Lack of time – I was too busy (34%)
- The invoice had no payment instructions (32%)
- The invoice was sent to the wrong person or email address (26%)
- The invoice items or amount were incorrect (25%)
- I lost the invoice (19%)
As you can see, managing receivables is complex with a myriad places it can go pear-shaped and it takes a concerted effort to always get it right. It’s no wonder the 115 million small businesses on the planet struggle to get to grips with this critical function.
Customer-centric credit control
As you can see, a few of those reasons for late payments involve you, the issuer of the invoice. Could it be that we’re part of the problem? Say it ain’t so. It may require a shift in thinking as the burden is on the product and service providers to do everything in our power to enable prompt payment. We should leave no stone unturned to reduce friction and make our clients happy – and speed up the flow of payments into bank accounts while we’re at it.
Remember, if your payment terms and processes are disorganised or misaligned with your customer’s payment process then you’ll be sending needless reminders, harassing good customers, eroding good will and cluttering inboxes.
Your credit control practices should be designed to serve your customer and make it easier for them to do business with you. They should also be designed to reduce credit risk and maximise your cash flow, however, striking a balance between these objectives is not easy. The great news is you already have access to a few of those solutions with Debtor Daddy. Sending personalised invoice reminders has never been so easy.
By taking a more customer-centric approach to managing receivables we can be smarter, reduce the late payment and not wave the stick. Of course, a lot of people will wring their hands, saying it’s simply not possible for a small business owner to design, implement and operate in this way.
Or is it?
The future of receivables management
Immersive 3D interactive receivables software anybody? I can imagine the accounts receivable professionals now, stumbling around the office in their black Oculus Rift goggles. No, but seriously, the most exciting innovations in the world today are usually the result of someone lamenting annoyance or pain about an everyday task and embarking on a quest to make it better. Couple this quest with emerging technologies like VR, AI and drones and you’ll get more than a modest improvement – it’ll be exponential and our lives will never be the same.
Think of Elon Musk, perhaps the greatest technopreneur of our age. Dissatisfied with the status quo of electric cars, solar power and even space travel he’s elevated our expectations of what’s possible and created a new norm for how we use energy.
So what’s this got to do with receivables?
Well, here’s the question we asked ourselves at Debtor Daddy. If we were seeking to solve the age-old problem of late payment in 2016 and weren’t afraid to challenge conventional thinking or apply new technology, what would it look like?
Here’s what we came up with.
The perfect receivables solution
Let’s quickly summarise why managing receivables can be tricky:
- You have to get a lot of things right
- Every customer is different and there is no one-size-fits-all
- The current tools are deficient and there’s still a world of pain. We must find a better way
Now let’s imagine what a ‘perfect’ receivables management solution might look like:
- It would treat every customer as unique – not a one-size-fits-all
- It would evolve and learn, improving over time
- It would achieve exponentially better results, with much less time, effort and cost
It pretty much sounds like having a team of collections or customer service experts at your disposal to optimise cash flow whilst building stronger customer relationships and increasing repeat purchase. Hmmm.
Problem. It’s only large enterprises that can afford to operate at this scale. How can we make this a reality for a smaller business? Let me show you how.
Robots and receivables
At Debtor Daddy we’ve collected masses of data, providing deep insight into purchase and payment behaviour of all the hard working Joe Bloggs’ out there. And you have too – whether you realise it or not – in your invoicing, job tracking and accounting systems. What if you could use that data to your advantage when it comes to improving your customer experience and getting paid on time?
Thanks to recent advances in data science and machine learning it’s now possible to leverage data benefits for small business.
This is the next frontier for our, the account receivable, industry. It’s going to be possible to make smarter decisions when it comes to managing receivables by drawing from thousands (if not millions) of data points, which is ten times better than your best guess on the day or a generic automated response.
With the kind of solutions we’re looking at developing, it will soon be possible to tailor your response to a late payment on a per customer basis but without the team of people that would traditionally be required.
Thanks to data science and machine learning, you’ll be able to factor an entire payment history of a customer, their industry, their likely future spend, their credit risk, and their preferred communication method. You’ll also tune the wording of a single interaction (phone or email) to optimise the likelihood of payment, retention and even referral. But it won’t stop there, what about being proactive and actually predicting late payment before it happens and then pre-empting it with the right intervention at the perfect time? That will be called great customer service and will not be considered overzealous follow up.
If you think this is too far-fetched, think again, because this is already happening in your Google Inbox and has been happening in your search engine results and Amazon book searches for years. Closer to home, you can also see it in the recently released Xero Assurance Dashboard alerting you to transactions or occurrences that need attention. It’s the perfect example of ‘machines’ doing the heavy lifting and making humans more awesome.
As you can see, the future of accounts receivable is looking bright and well-developed technology is going to bring wholesale improvements to the industry and to Joe Bloggs.
Debtor Daddy is automated software that manages your overdue invoices at the click of a button, sending reminders to your clients when their payments are overdue and following up automatically, so you get paid without having to chase.
Click below to start your free two week trial and never chase an overdue invoice again.
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This article was originally published in XU Magazine.