Late Payers: Who’s Really to Blame?

Are late-paying customers really deliquents, or just unhappy? Before canceling accounts or calling a collection agency, make sure past-due payments aren’t as much your fault as theirs.

Some companies purposely pay slowly to conserve cash. But, according to Mark Tennant, a working capital expert with the consulting firm REL, many late payers are simply reacting to mistakes made by vendors that charged the wrong amount, sent an invoice to the wrong address, left key information off an invoice, or, perhaps worst of all, delivered damaged or out-of-spec goods or services.

Pricing errors are the most common culprit behind late payments, according to Analisa DeHaro, leader of REL’s North American customer-to-cash practice. “Either there was some agreed-upon pricing or discount that should have been reflected on the invoice but wasn’t, or information that should have been on the invoice was missing,” she says.

DeHaro recently worked with a client whose major customer required vendors to submit invoices through an electronic system. Payment was promised in 30 days. “If our client got all the information into the system correctly — the right numbers, the right documentation — they got paid on the 30th day like clockwork,” DeHaro says. “But if they didn’t, if they had the wrong purchase order number, or didn’t have a purchase order number and just put a dot in that field, their customer would not notify them of the mistake and they wouldn’t find out about it until 15 or 30 days past the due date.”

For Hal McClure, CFO of Pace Resources, a $51 million York, Pennsylvania-based holding company, getting invoices right is critical to maintaining the company’s cash flow. Pace Resources owns architectural and engineering firm Buchart-Horn and printing company Print-O-Stat. About 90 percent of the company’s engineering work is with government agencies, from local water authorities to the Army Corps of Engineers, and when they pay late, the issue isn’t their ability to pay, according to McClure. “It’s usually some kind of contract dispute or billing issue,” he says. “In some cases, just being off by pennies in your billing — a rounding error — will cause them to reject your invoice, and you have to go through the whole cycle again to get it reapproved.”

Taking a proactive approach
To avoid sabotaging your billing and collection efforts, manage the process actively. “Too often, companies allow this to become a reactive exercise,” says Tennant, president of the Americas for REL. “In the hierarchy of things to be done, this is pushed into the lowest quartile, and the people responsible don’t have the tools, metrics, systems or workflow capabilities to quantify the volume or the value of the problem.”

Those lower-echelon employees often lack authority to take actions necessary to satisfy the customer, too. So, instead of resolving problems, they end up issuing credits that reduce or eliminate the amount a customer owes. “Not only have you delayed payment,” Tennant says, “but you’ve taken a hit to the bottom line as well.”

At Pace, McClure presses project managers to work closely with the company’s billing staff to monitor amounts they invoice customers and make sure work is billed within contract terms, which can vary from customer to customer and project to project. The company also uses dedicated project-management accounting software to automate much of the billing process and minimize opportunities for human error. Over the past decade, those activities helped reduce a key working capital performance metric, the company’s “days revenue outstanding,” to the mid-60s from the mid-70s. It also allowed a reduction in the number of people doing billing to four from six, even though the company is now about 30 percent larger.

Like Pace, DeHaro’s client improved its billing procedures, implementing a validation process for invoices submitted electronically. The client began by reviewing and updating its existing customer information and requirements in its own invoicing system to minimize errors. Then the client’s staff programmed the system to check certain fields before billing and identify any data that is incomplete or incorrect.

Identifying problems
If you’re not sure why accounts receivable are out of control, REL recommends a rigorous analysis of your customer base to calculate how long each typically takes to pay invoices. Identify those that habitually pay late, talk to your collections team to find out why, and work with the appropriate personnel to correct the problems, whether they’re in sales, billing, operations or shipping.

“Once a collections person has identified an issue, it should be directed to someone who has the authority to resolve it,” says Tennant, the REL exec. If it’s a matter of sales personnel agreeing to non-standard terms but not sharing that information with accounts receivable staff, for example, you may need to improve communications between those two departments. Late payments stemming from missed delivery dates could be traced to any number of issues, ranging from the farthest reaches of your supply chain to your loading dock.

Tennant also suggests structuring compensation to reward employees — especially revenue producers — not just for bringing in business but also based on cash flow. At his firm, for example, sales personnel receive commissions based on business that’s booked, billed and collected. “Things like that are important,” Tennant says, “to make sure people outside of finance take this issue seriously.”

Correcting problems that lead to past-due invoices may not be the most glamorous part of a company’s operations, but it can improve the income statement and balance sheet. “This is, in fact, where a lot of opportunity in cash-flow improvement can be found,” says REL’s DeHaro. “It is the first place to look when you are looking for opportunities in the customer-to-cash cycle. Often, the problems revolve around internal processes that are easily addressable.”

As a bonus, identifying and correcting the underlying causes of collections problems can yield auxiliary benefits, such as resolving quality-control issues or improving operating efficiencies — all good reasons for raising the bar on your billing and collection activities.