ACCELERATING CASH FLOW

WHY DO THE SAME EXACT WORDS MEAN DIFFERENT things to different people? Take the word shopping, for example.
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ACCELERATING CASH FLOW

May 1, 2002 12:00 PM, ALAN KRUGLAK

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

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Being a supportive spouse, I made the foolish mistake of telling mywife that I would accompany her to shop for a dress at Saks. I thoughtthe process would take 20 minutes at the most. When we returned homefrom our “shopping adventure,” it was several hours later,and I was in a mild state of shock. That's when my wife utteredsomething that knocked me off of my feet. She said, “I'llprobably return this dress tomorrow.” Although we both spoke theword shopping, we clearly had different notions of what we weretalking about. I had imagined a quick trip to store; she had envisioneda significant investment of time and energy — and at least oneadditional follow-up excursion to return the original and find asuitable 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 ourclients were slow payers because their clients, in turn, were slow topay. Although that was true in some cases, I discovered that there wereother reasons why people don't pay invoices on time. More often thannot, there's a failure to communicate or two divergent interpretationsof 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 cumbersomeand hard to decipher. When we went to our controller to express thisconcern, he became defensive. “There's absolutely nothing wrongwith our invoices,” he said. “What's the matter with thesecustomers? I understand everything on this invoice, so why can'tthey?”The fact is, our invoices were difficult for many clients tounderstand, especially when there were multiple change orders for aspecific project. Even I couldn't understand them! If the clientdoesn't easily understand an invoice, the invoice won't get paid.We overcame the problem in two steps. First, we recognized that theproblem existed and helped implement a change in attitude in ouraccounting department. Then we did what clients asked, making ourinvoices user-friendly and designing them to meet client needs.
  • Work Isn't Always Complete or Satisfactory. Every five years, wereplaced the carpet in our offices. The last time we replaced it, thecarpet vendor did a lousy job, marking up our baseboards and detractingfrom the image of our office. When the company called to inform us thatour payment was past due, we let them know we weren't paying until theproblems were fixed.You probably recognize the scenario: The service department says thework has been completed, but when you try to collect, the client won'tpay because they're dissatisfied. That type of client actually serves auseful purpose to your organization, providing a vital check on thequality of your services. If a client isn't pleased with your work,there's no way the production department can hide it, because theaccounting department won't be able to collect it. Sooner or later, theaccounting department will know why the payment wasn't made andsomebody is going to have to go out and make the customer happy. That'show accounting can be an important part of your company's internalsystem of checks and balances.
  • Invoices Get Stuck in Large Bureaucracies. Many large corporationshave a bureaucracy that processes all payments. The bureaucracy servesan important regulatory function, checking and rechecking inflow andoutflow of cash in large companies as invoices meander from desk todesk. The larger the company, the more centralized the accountingfunctions, and the slower the payment cycle.In most cases, there is nothing you can do about that except toaccept it as a condition of doing business with a large company. Youprobably won't get paid within 30 days, and sometimes it may extendpast 60 days. But I wouldn't let the problem exceed 90 days.In the mid-1980s, my company had a national contract with GTE Sprintand, like most utilities, it was slow in paying its bills. In 1986 wefound ourselves in a cash flow crisis, and Sprint owed us $200,000 ininvoices that were more than 120 days old. We didn't want to upset theclient because we wanted future business, but at the same time, we hadto meet payroll and were close to defaulting on our bank covenants.So I went to Sprint's office in Burlingame, California, and told theclient that I needed the check that day by 5 p.m., because I had tocatch an evening plane to our offices in Washington. I told him firmlyand in no uncertain terms that I needed that check immediately. I wasexaggerating somewhat, but the acting certainly helped my case.“If I have to go into your president's office and sit on his deskuntil I get paid,” I told him, “then I will do justthat.” I was determined to get paid, and I made sure my clientunderstood.My client asked me to wait in his office, and 45 minutes later hereturned with a check for $200,000. I was thankful and happy that mybluff had worked. It would have certainly been uncomfortable staging asit-in on the president's desk, but drastic times require drasticmeasures. Have as much patience with large companies as you can, but beassertive 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 ofyour 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 badhabits, one way to address this problem is to refuse to do anymaintenance or future work. That was our greatest leverage, and we usedit to get payments from most clients with past due invoices. As withlarge companies, it helps to be firm and to define your situation asclearly as possible.

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

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

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