The Pursuit of Payment: The Secret to Getting Clients to Pay On Time

For any small business, payment from clients and customers is the life-blood for keeping an organization alive. Without a doubt, one of the biggest challenges that small businesses face in this economy is getting paid on time.

What many small businesses don’t realize that getting clients to pay on time is an art form -- taking a certain amount of finesse, tenacity and friendship building.

Following is the secret sauce that I use to get clients to pay on time.

Tip #1 – Have your “finance person” follow-up on all payment matters. If you are the person doing work for a client/customer, it helps that you are not the one following up on payment related matters. This creates a layer between you (the client service person wishing to keep and grow the account) and the need for payment. If do not have someone, find someone (your wife/husband/”accountant" just might do the trick).

Tip #2 – Send invoices out in advance. If the work is going to be performed and billed on a certain completion date, send the invoice out in advanced of that date with the expected completion date on the invoice. The goal is to get the invoice into the accounting system as quickly as possible, even if the invoice date is in the future.

Tip #3 – Send regular statements (via email and in hard copy). On a monthly basis (at a minimum), revisit your Accounts Receivable listing and create a process of sending statements to clients who have not paid.

Tip #4 – Be friendly, appeal to the “human side” and befriend the Accounts Payable person. In the beginning of the pursuit of payment, the old adage “you get more flies with honey” is extremely true. The goal is to become friends with the Accounts Payable person and make every correspondence upbeat and friendly. Make sure to thank the person for any effort but be sure to ask for specific expected payment dates.

Tip #5 – Talk to others in the organization. If the Accounting person is not paying the bills, the chances are great there is a reason (these people are usually agnostic with respect to who is getting paid). Make sure to talk to your client/customer liaison as soon as possible and ask for reasons why the bills are not being paid.

Tip #6 – Stay away from lawsuits. In my early years of playing this game, I was keen to involve a collection lawyer early in the process. I have found that it is much easier to appeal to a person’s sense of doing the right thing then threaten a lawsuit. If the client is now a former client and simply does not return calls, etc., engage a lawyer to write a threatening letter and do the minimum at first on an hourly basis and not on a contingency basis (which is usually a third on the balance).

Don’t let perfection get in the way of action

Sometimes management’s biggest fault is a lack of action.

In many cases, project owners want to produce the best product or service. And, as a result, are slow to finalize a project. This happens a lot of times with software builds. The project owner wants to have a product that is bug free and perfect for the end user.

As business owners, moving forward and creating new opportunities is the key to progress - and we need to continually put something out there. In the words of Fred Foster, an inspirational trainer & speaker, “it is more important to be accurate as it is to be precise. For example, if you are shooting at a target, it is better to have more shots in the circle around the bulls eye than to actually hit the bulls eye.”

This means that even if the project is only 80% or 90% perfect, it is better to move forward than to strive for the 100% - because it may never be 100% perfect and the opportunity may pass you by.

I like to call this approach to completing projects “The Google Approach”. Google is notorious for creating software that is in Beta version but is available for use. We recently used this approach when our Tax App for the Android and iPhone was created. We could have spent another month re-designing the interface and/or including more tax data but decided to finalize and get the App out before the end of the 2010 tax year. This worked well and we have had thousands of downloads.

It is important to continually create and build. When doing so, be sure to not let perfection get in the way of action.

100% of nothing is…NOTHING (Share the Wealth)

In earlier blogs, I mentioned that it is important for businesses to “guard” company equity. While I still maintain that, at times, this is important, there are also times when it is critical that prospective investors and employees be rewarded with equity. Here are a few times:

Angel/initial round raises. Many entrepreneurs get so focused on company valuations (when there is not even a proven business model) that they lose out on investment capital due to company valuations being too high. In addition, entrepreneurs sometimes turn away investors because they think that they have raised enough capital and they do not want to dilute the company shares.

Employees rewards. Many company founders are stingy with stock options for employees. Again, they feel that they do not want to “dilute” the company value with option shares. What entrepreneurs fail to realize is that stock options tend to keep the employees dedicated. And, dedicated employees are usually the sole reason for a company’s success (or failure). I can think of numerous examples of companies that did not include employees in option rounds and ultimately failed.

I still maintain that companies need to guard equity in situations where a company is strong and profitable. However, for companies that are just starting out, founders may want to share the wealth – because 100% of zero is….zero!

Debt Can Be a Great Thing When Raising Money

With President Obama and the Small Business Administration’s push to lend Money, now may be a great time to raise money via Debt (instead of Equity). Below are 5 reasons why:

1 – The SBA Debt is Cheap. We have seen a few SBA deals recently and the loans appear to be priced inexpensively relative to an equity finance cost of capital. This means that there exists a potential to benefit greatly from the gains due to the leverage. (Note: There is an MM Theorem in traditional finance which states that Leverage is irrelevant, meaning that a company’s cost of capital will not change with leverage, because as a firm increases its leverage the cost of equity will increase to offset gains on leverage. The current SBA deals seem to indicate that this theorem does not apply).

2 – Tax Benefit. Interest on debt is tax deductible, whereas, dividends on equity is not deductible (and actually can be taxable). In fact, the higher the marginal tax rate of the company, the higher the amount of debt a company should have in its tax structure.

3 – Discipline to Owners/Management. Debt adds an element of discipline to an organization. The old adage “Equity is a cushion; Debt is a Sword” certainly applies. In fact, the management teams of firms with high cash flows left over each year are more likely to be complacent and inefficient.

4 – Ownership Stays the Same. Although most likely creating financial covenants, financing through debt keeps the control of an organization intact. Owners/Managers value control.

5 – Creditors Are Not in Your Business. One of the biggest downsides to debt is the possibility of being forced into bankruptcy and/or being taken over by a lending institution. Although this is possible and has been happening more frequently than ever, we have seen that banks have no intention to take over a company that has fallen behind in interest payments (or broken a financial covenant). Banks would much rather work with a company than take it over.

TAX ALERT: Our 2011 Android Tax Reference Application Has Arrived!

Our 2010 Tax Reference was successful and appreciated by many around the country. We have had thousands of downloads. The 2011 Tax Reference Application for the Android is even better:

>It has includes the many legislative changes for 2011

>It now includes State tax information:

>AND it allows for receiving our new Tax Alert service (which may help save you from penalties)

If you have an Android phone, check it out! Go to the Android marketplace and search for “2011 Tax Reference". Click on this link for a preview:

http://www.androidzoom.com/android_applications/finance/2011-tax-reference_shql.html?nav=related

Top Tips for Entrepreneurs

Here is a recent interview with tips for starting a business:

http://www.myobpod.com/myob_2011-01-24.aspx

Highlights include:
1 - Do not start a business with the intention of immediately selling it; 2 - Raise more money than you need and try to get to profitability as soon as possible; 3 - Don’t let perfection get in the way of action

I hope this is useful.