ACCELERATING CASH FLOW

May 1, 2002 12:00 PM, ALAN KRUGLAK

WHY DO THE SAME EXACT WORDS MEAN DIFFERENT things to different people? Take the word shopping, for example. From a typical male perspective, shopping can be defined as the process of quickly acquiring what you need, with emphasis on quickly. From a woman's perspective, shopping means going on an extended outing, looking not so much for a specific item, as for the process of acquiring itself.

Being a supportive spouse, I made the foolish mistake of telling my wife that I would accompany her to shop for a dress at Saks. I thought the process would take 20 minutes at the most. When we returned home from our “shopping adventure,” it was several hours later, and I was in a mild state of shock. That's when my wife uttered something that knocked me off of my feet. She said, “I'll probably return this dress tomorrow.” Although we both spoke the word shopping, we clearly had different notions of what we were talking about. I had imagined a quick trip to store; she had envisioned a significant investment of time and energy — and at least one additional follow-up excursion to return the original and find a suitable replacement.

Business presents obstacles like that all the time. For example, let's take the case of the slow-paying client. For years, I thought our clients were slow payers because their clients, in turn, were slow to pay. Although that was true in some cases, I discovered that there were other reasons why people don't pay invoices on time. More often than not, there's a failure to communicate or two divergent interpretations of what it means to pay on time.

Clients Don't Always Understand the Invoice. At my former company, many people didn't pay us promptly because our invoices were unclear. Clients didn't understand our invoices and thought they were cumbersome and hard to decipher. When we went to our controller to express this concern, he became defensive. “There's absolutely nothing wrong with our invoices,” he said. “What's the matter with these customers? I understand everything on this invoice, so why can't they?”

The fact is, our invoices were difficult for many clients to understand, especially when there were multiple change orders for a specific project. Even I couldn't understand them! If the client doesn't easily understand an invoice, the invoice won't get paid.

We overcame the problem in two steps. First, we recognized that the problem existed and helped implement a change in attitude in our accounting department. Then we did what clients asked, making our invoices user-friendly and designing them to meet client needs.
Work Isn't Always Complete or Satisfactory. Every five years, we replaced the carpet in our offices. The last time we replaced it, the carpet vendor did a lousy job, marking up our baseboards and detracting from the image of our office. When the company called to inform us that our payment was past due, we let them know we weren't paying until the problems were fixed.

You probably recognize the scenario: The service department says the work has been completed, but when you try to collect, the client won't pay because they're dissatisfied. That type of client actually serves a useful purpose to your organization, providing a vital check on the quality of your services. If a client isn't pleased with your work, there's no way the production department can hide it, because the accounting department won't be able to collect it. Sooner or later, the accounting department will know why the payment wasn't made and somebody is going to have to go out and make the customer happy. That's how accounting can be an important part of your company's internal system of checks and balances.
Invoices Get Stuck in Large Bureaucracies. Many large corporations have a bureaucracy that processes all payments. The bureaucracy serves an important regulatory function, checking and rechecking inflow and outflow of cash in large companies as invoices meander from desk to desk. The larger the company, the more centralized the accounting functions, and the slower the payment cycle.

In most cases, there is nothing you can do about that except to accept it as a condition of doing business with a large company. You probably won't get paid within 30 days, and sometimes it may extend past 60 days. But I wouldn't let the problem exceed 90 days.

In the mid-1980s, my company had a national contract with GTE Sprint and, like most utilities, it was slow in paying its bills. In 1986 we found ourselves in a cash flow crisis, and Sprint owed us $200,000 in invoices that were more than 120 days old. We didn't want to upset the client because we wanted future business, but at the same time, we had to meet payroll and were close to defaulting on our bank covenants.

So I went to Sprint's office in Burlingame, California, and told the client that I needed the check that day by 5 p.m., because I had to catch an evening plane to our offices in Washington. I told him firmly and in no uncertain terms that I needed that check immediately. I was exaggerating somewhat, but the acting certainly helped my case. “If I have to go into your president's office and sit on his desk until I get paid,” I told him, “then I will do just that.” I was determined to get paid, and I made sure my client understood.

My client asked me to wait in his office, and 45 minutes later he returned with a check for $200,000. I was thankful and happy that my bluff had worked. It would have certainly been uncomfortable staging a sit-in on the president's desk, but drastic times require drastic measures. Have as much patience with large companies as you can, but be assertive when you need to be. If you need to play the squeaky wheel, do it.
Sometimes the Client Is a Deadbeat. No matter what you do, some of your clients will pay slowly. They don't understand (and may not care) how slow payments affect your relationship. They're habitually tardy, and they enjoy it. Though it's hard to get a client to change their bad habits, one way to address this problem is to refuse to do any maintenance or future work. That was our greatest leverage, and we used it to get payments from most clients with past due invoices. As with large companies, it helps to be firm and to define your situation as clearly as possible.

There really is no mystery to the problem of slow payment: People just have different ideas of what it means to pay on time. Reasons usually fit into one of these four categories, and if you can read the situation, it's usually easy to fix.

Management Perspectives are excerpted from the series of business books written by Alan Kruglak based on his experience operating a systems integrator and achieving gross margins of 54 percent and operating profits of 20 percent. For more information, contact Kruglak at 301/365-7522 or akruglak@erols.com.