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Collecting Your Receivables When Your Customer Are Having Cash Flow Issues

“You must get control of your account receivables”
- United Mediation Services

10 years, you have seen recessions before. The Internet bubble burst in 2000; there was a recession in the early 90s; the early 80s saw a recession and sky-high interest rates. Some will remember the problems of the 70s.

Economic downturns are cyclical and expected; but that does not make collecting receivables any easier. Bankruptcy rates for businesses rose 41 percent between 2007 and 2008, with the 2008 to 2009 expected to be even higher, according to a U.S. Courts news release, including:

  • Chapter 7 filings up 36.7 percent
  • Chapter 11 filings up 30.6 percent.

For an example, In Hawaii, bankruptcies rose 49.3 percent to 3,201 in 2009 from 2,077 in the previous year, according to final data released yesterday from U.S. Bankruptcy Court. 

What is a business owner to do? With everything else we have to worry about, these are scary figures for a company trying to get paid, pay employees and suppliers, and stay in business themselves.

"The biggest issue is managing the company's cash flow; knowing if and when you have been paid," says John Pillow, managing partner & CEO. "It's hard to manage the financial commitments for your business if you don't know how you’re your customers are doing; and if and when the money is coming in."

Cash will continue to be tight for America’s small-business owners in 2010 as banks are held to tighter standards, making it difficult to get startup capital or to expand existing enterprises.

In order to fight tight cash small businesses must manage the cash flow, the receivables need to keep coming, even if the customers are suffering poor cash flow themselves.

There are six major points to keep in mind for collecting those ever-important receivables, even in hard times:

  1. Stay in constant contact with the customers who owe you money.
    If a customer has limited cash, they'll pay the people that are pushing for the money before the people who are not. Commonly called the “Squeaking Wheel”. Call the customers, be nice and professional, and build that relationship over the phone. At some point human nature takes over, and the customer will think, 'I wish that person would stop calling me,' and the account will get paid.

  2. Study the payment history of your customers, and take note if any start to change.
    “If a company usually pays in 34 days, but one month pays in 38 days, and the next month pays in 41 days, concentrate on that company,” said Pillow. "Patterns–Patterns–Patterns. You have to be constantly watching how your customers are doing and watch the aging of receivables and looking for weak account debtors. Make sure you collect from them."

    And for those accounts that have been slow to pay for the entire time they have been your clients, maintain good contacts with that company, and be sensitive to their business needs. Let them know in a firm but nice way that you have business needs as well. "Find that common ground for a WIN-WIN-WIN situation to work through those business issues," said Pillow.

  3. Consider adopting some consumer collections practices. In the past, businesses have hesitated to implement procedures used on the consumer side. B2B collections have not always been lenient for working out various terms, so businesses might not know they have options. Work out a plan with the customer, suggests Pillow, such as the ability to take a credit card or to spread out payments over time. As a last resort, consider a settlement plan to accept an amount less than what is owed, with the theory being that some money collected is better than none.

    “Determining whether a client has the ability to pay, or the desire to pay is an art, not a science. I think something is better than nothing," says Pillow. Utilize various tools to assess a customer's health, including commercial credit reports and Dun & Bradstreet reports to make an educated call about whether the business is in financial distress or not. Keep track of how your clients are doing.

  4. Know what NOT to do.
    If you suspect that a client may be headed toward bankruptcy, do not raise your prices or accelerate your billing cycles. Its okay to continue frequent phone calls and normal collection practices, but you cannot attempt to collect your money by changing your prices for the same goods, or by invoicing every 15 days instead of every 30. Here's why: If the company files for bankruptcy, the court will look closely at transactions within the 90 days prior to the filing. Any exchanges outside the normal course of business will be considered "preferential treatment" and the money will have to be returned.

  5. If a customer does file bankruptcy, sit tight.
    In a Chapter 11 bankruptcy a company stays open while it tries to reorganize. Creditors, including your business, will be invited to join a collections committee, but secured lenders, like banks, wield the most power. You'll be among those to whom that the customer presents its reorganization plan, and hopefully that plan will allow the customer to start turning a profit. If and when that happens, you'll get your receivables.

    If the customer is unable to come up with a reasonable reorganization plan, it will probably enter Chapter 7 bankruptcy, where the company closes its doors and liquidates its assets. In this case, a trustee will sell off the company's assets and distribute the proceeds, with the secured lenders getting paid first.

    Obviously, collecting receivables from a customer in bankruptcy is tough and should be avoided at all costs. How?

  6. Be careful about who you extend credit to in the first place. To avoid the hassles that go with bankruptcy, or impending bankruptcy, be proactive on the front end. Clearly understand to whom you are granting credit. Take a close look at your company's standards for assessing risk and extending credit. And while new customers are exciting, new customers with poor credit profiles are risky. Not a lot of companies are in a growth mode, but if you are and not sure of a new customer's credit-worthiness, be careful, cautions Kuppens. However, "If you are in regular contact with your customers, there should be no surprises."

    In the end, the best advice is old fashioned stick-to-it-ness. The squeaky wheel gets the oil; the early bird gets the worm; and out of sight, out of mind.

United Mediation Services is a nationwide company that has been in business for over 11 years. The founders of the company are college graduates with more than 20 years experience each in the collections industry, with a cumulative experience of more than 70 plus years. Each of the employees must have a minimum of 10 years of collection experience, and MUST be Certified Professional Debt Mediators.

Mr. Pillow is a strategic and analytical leader who for nearly 30 years has been involved with high growth companies, working with start-ups and being the entrepreneur in several small companies.

He currently belongs to the Dallas Regional Chamber of Commerce, the Technology Business Council Committee, the International Business Development Committee, the Government Relations Committee, and the Plano Chamber of Commerce Public Policy Committee.

Mr. Pillow has received considerable recognition for his roles in various industries. In the past, he has served on the Texas Apartment Association of Legislative Affairs Committee as well as for the National Apartment Association, American Hotel and Lodging Association’s Technology Committee and their Legislative Affairs Committee, has been a representative to Dallas Area Rapid Transit (DART), He was one of the hotel industry’s spokesperson for more than fifteen years. Mr. Pillow is the past Vice President of the Texas Jaycees, president of several organizations including Lions, Jaycees, Chambers of Commerce and served on the board of the Central Highway Committee for Dallas County. He has been a member of the World Future Society, National Speakers Association and the International Platform Association. Mr. Pillow is included in Who’s Who in Industry and Finance, and Who’s Who in Sales and Marketing.

Mr. Pillow holds a Bachelor of Science degree from the University of North Texas. He studied pre-law at the University of Texas, and he completed the Master of Hotel Supply program at the Educational Institute.


John Pillow
United Mediation Services