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In a tough economy, the check may not be in the mail. But small businesses, often the last to be paid, have developed some tactics to unclog the logjam.
Cynthia McKay has developed a certain flair for acting as her own collection agency for her holiday-gift-basket business.
When corporate customers who eagerly order luxury foodstuffs in December turn into slow payers in January, Ms. McKay, founder and chief executive of Le Gourmet Gift Basket Inc., does her best to persuade them to cough up the cash. In spring, if an invoice is still outstanding, she delivers another basket to the company's chief executive, containing some deluxe chocolate--and a small-claims-court subpoena. "I don't want to leave a bad taste in their mouth, but I do want to get paid," she explains.
Ms. McKay's tactics may verge on the dramatic, but consider that her Castle Rock, Colo., business, with $3 million in revenues, has invoices that are as much as 18 months overdue. On average, she files in small-claims court five times a year.
Small-business owners and entrepreneurs nationwide are grappling with similar problems. In a tough economic climate, they're at the bottom of the payment food chain, the first to get their invoices pushed aside by customers trying to conserve cash and the last to be paid by their Fortune 500 customers. Since new customers can be hard to find, however, maintaining an existing business relationship is vital.
"The trick is to walk that fine line," says William Dunkelberg, former dean of the business school at Temple University and chief economist at the National Federation of Independent Business.
So companies are developing a range of creative alternatives for collecting their cash. Hiring a collection agency to dun customers for payment may work, but it's an expensive last-ditch strategy that can torpedo a customer relationship. Collection agencies can charge anywhere from 20% to 50% of the amount owed, depending on the arrangement between the business and the agency. (A smaller percentage applies if you have them on retainer and pay up front; if there's no success, you can still be charged a flat fee).
Instead, entrepreneurs are becoming their own "kindler and gentler" collection agencies: rewarding accounting-department clerks with ice cream and cookies for hitting weekly collections targets, appealing in person for payment to customers' senior managers, and adopting a range of new technologies to speed up payment.
That's become vital as customers are taking longer and longer to pay, says James Kerstein, chief executive of Polywood Inc., a company in Edison, N.J., that uses recycled plastics to make industrial products such as railroad ties and bridge substructures. "Historically, we'd get paid in 15 to 30 days, but today it's very typical to be at 90 to 105 days, and 60 to 75 days is now standard," he says. Sometimes he will redirect inventory to quicker-paying customers, and then contact his original customer and put his cards on the table.
"I'll explain that we try to keep their pipeline filled and not hit shortages," he says. "But then I'll add that for us to keep purchasing raw materials and keep production going for them, we have bills to pay."
Going to the Top
That kind of top-level contact can be vital, says Mr. Dunkelberg. "An accounts-payable clerk isn't going to have the same appreciation as the [chief executive officer] or [chief financial officer] of the value of the relationship with your company," he says.
"The squeaky wheel gets the grease," agrees Bill Maloney, a Tampa, Fla.-based partner at Tatum Partners, a firm that provides experienced chief financial officers on contract. Mr. Maloney, wrapping up a nine-month assignment at the financial helm of a troubled materials-handling equipment sales-and-distribution business in Florida, finds that calling a customer's CEO can shake loose the much-awaited payment. "It's at a professional level, you're not just dealing with a clerk paid to give you the runaround," Mr. Maloney adds.
Mr. Maloney trained clerks at the Florida company to recognize that runaround and avoid it. Their success in doing so brings rewards: At his most recent assignment, they got ice cream and cookies every Friday if the week's receivables totaled $1 million or more. "Our receivables soared," he says.
Other leverage works as well. Shaun Buss, chief financial officer at Web-design firm Refinery Inc., won't provide the source code for a new Web site until the final payment is in the bank. "That has sometimes tipped the balance in getting paid promptly," Mr. Buss says.
Working the System
Sometimes, working with the system is the key. Many larger companies now use electronic-payment systems, and sending invoices adapted for those systems pays off. Mr. Buss says the work is labor-intensive -- in one case, he had to break down costs into 25 separate categories and budget codes. "It can take me five days up front to do the work on the invoice, maybe a total of three weeks to get approvals," Mr. Buss adds. "But once it hits their electronic system, I'm paid quickly, sometimes in as little as 10 days."
Doug Davidson, marketing manager for Bank of America's small-business-banking group in Sarasota, Fla., says such tools not only cut costs, but allow entrepreneurs "to come across as having a more sophisticated receivables department."
If customers aren't ready--or willing--to adopt this kind of technology, Mr. Davidson suggests allowing them to pay by credit card. Small businesses have been quick to adopt paying their own bills by credit card, he says, but slower to accept cards in payment themselves. "They need to recognize that convenience is going to be rewarded by customers in the form of quicker payments," he says.
Experienced hands caution that threats should be used only when getting paid is more vital than maintaining the customer ties. Tad Ballantyne, former owner of BR Holdings Inc., a steel-castings company in Racine, Wis., saved his company by threatening to withhold shipments until customers paid in advance for their goods. Having no alternative supplies, the de facto hostages paid up, solving the company's cash crunch. "I lost about half of them later, but by then it wasn't a crisis any more," Mr. Ballantyne recalls.
Others prefer to diversify their customer base to spread the risk. Fern Reiss, chief executive of PublishingGame.com, a specialty publisher, has battled book wholesalers and retailers for four years. "They play games to stretch out payment for 180 days, then instead of paying, they return unsold books for full credit," she says. Returns have been standard in the book trade since the Depression, so Ms. Reiss has begun selling her books to unconventional outlets like coffee shops and movie theaters.
"It's great: They think they have to pay immediately, and they don't know about returns," she marvels. "And the margins are better."
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