The astute owner/manager knows the whole point of prospecting, doing a great proposal, making a sale, and successful delivery is to turn a profit. You can only do this by collecting the money for the job and maintaining your cash flow by using your credit and credit terms wisely. One of the worst situations, especially with large commercial jobs, is to make a sale with a nice projected profit and be unable to collect in any timely manner, or at all.
Risk assessment.Controlling a potential disaster goes all the way back to the time when you did that great proposal. How carefully did you assess the chances of getting paid, and in a timely manner? Did you ask the question: For our very best price and terms, how soon will you process and pay our invoices? What procedure do you recommend for us to ensure prompt handling of our invoices by your accounts payable team?
If you feel there is a strong chance you may land the job, I’d suggest that you run a credit report, perhaps a Dun & Bradstreet Paydex score or other equivalent. This will let you know how responsibly your potential client handles his bills and if you want to do business with him. I once ran a credit report on a general contractor and found that two other flooring contractors had legal claims against him.
I called one of my contacts, and when I mentioned the general contractor as a potential client, he laughed and said, “He owes everyone in town and has bankrupted at least one other dealer. If you want the job, you’d better pack in some profit, get front money, and be prepared for extended terms.”
So forewarned, I put together a tight proposal and had a candid discussion with the general contractor. It turned out he was struggling, but was willing to allocate funds to ensure payment. The job went well; payment was made on time.
Knowledge is power.You should always set the payment terms that benefit you. Make sure the buyer has a real financial interest in the job by giving you a deposit; go ahead and ask for 50%, you may just get it. Be wary when he asks for 30-45 day terms.
At a minimum, you want money from the buyer before you set foot on the job. This may mean that you settle for payment for stored materials when they are delivered to you, in lieu of an up-front deposit. This method is particularly important when you are doing a large job over a number of months with a complex schedule.
It is always best to maintain as much leverage as possible. “Ken, I’ve received all of the materials for Phase 2, and have sent you a progress billing; however, I haven’t yet been paid for Phase 1 materials, or its installation. I’m reluctant to start Phase 2 until that is cleared up. I’m sure you understand.”
In a nice way, you have put Ken on the spot to release payment or you will hold up the job by not delivering materials and starting installation until he pays for Phase 1. You’d be surprised how quickly his accounts payable section can complete their review when faced with this dilemma. And if he does not follow through, you will find there is a problem before digging an even deeper hole for yourself.
Supplier terms.As important as it is to write a good proposal, it is even more important to make sure that you and your potential supplier have a great relationship. The credit terms and credit limit offered you by your supplier are as important as the project pricing.
This will vary according to the size and parameters of the project, and can make or break you. The key here is how soon you can get paid by your client. Did they tell you 45-60 days? If so, to pay your supplier you may have to use your cash flow to make their terms work. Of course, the important factor is do you have enough cash flow to make this extra payment, or will it impact you adversely?
Negotiate from a position of strength if it is an important, high profile, extremely desirable project where the supplier is salivating for the business; shame on you for not getting 3/60, 2/75, net 120-day terms. In one huge job, the manufacturer was willing to go with 120-day terms because they knew payment was assured but would be slower since the federal government was involved.
An integral part of negotiation is your credit limit with the supplier. If the project requires multiple phases or shipments, how does each phase and product amount required match up with your credit limit, the terms being offered, and the expected payment from your client?
Nothing is more frustrating than having a supplier put a shipment on hold because payment has not been made for a previous purchase. Separate a particularly large project from other ongoing business so one will not impact the other. This may or may not be possible, but have that conversation with your supplier rep and his credit manager up-front. It is especially difficult to negotiate extra terms, discounts, and increased credit limits after the project has already begun.
Timely billing.One of the best things you can do to ensure good cash flow and collection on commercial jobs is have the right person overseeing the details of project phase completion, billing according to scheduled values, and proper format invoicing. In most successful outcomes, the key players are a project coordinator and a collections supervisor.
Make sure that your job does not encounter these absolutely horrendous problems: The completed work was never invoiced; the billing did not match the completed phases; the billing did not match the schedule of values originally presented; invoicing was done in the wrong format; billing was late and missed the cut-off schedule; invoice was sent to the wrong office; and/or the invoice was not presented for approval and therefore was not processed.
Good people who love details, understand the projects, and work well with others can make this a smooth process in accounting, sales and installation that will enhance cash flow. Also, they can alert you when problems come up. “Dave, I just talked with Annette over at the jobsite and she told me they are still sitting on last month’s requisition and haven’t approved it for payment. She says we haven’t completed the punch-out on the sixth floor.”
Or, “Jerry, we really need to see if we can pick up a check for last month’s billing. How about following up with your processing contact and see what you can do to speed it along.” Jerry ended up taking Jacque to lunch and asked for her help in tracking down the necessary signature on the paperwork. She did and we got paid promptly.
Collection activities.This will depend on the client, his history with you, the amount of time a billing is past due, and the amount of money involved. Whenever possible, pick up a check when the job is completed and approved. Use the typical retail sales process, which is to have the installer pick up a check before he leaves the job; this should be the norm for all Main Street commercial jobs, and other smaller commercial jobs.
If you were clear in your proposal on when the balance due is to be paid, then a good technique is to call your contact a day or so after the job was completed to make sure he has received the invoice and to answer any questions. I cannot count the number of times I have heard, “I don’t ever remember receiving an invoice, and I cannot sign off for payment until I get it.” I have asked more than one client to wait by their fax machine for a copy, and then called them back to make sure they got it. Ask them to “walk it through” to their accounts payable section, especially if it is past due. You might as well find out up-front if there is going to be a delay.
A word to the wise: If you treat timely payment as an important issue, so will your client; if you are lackadaisical, they will be also. Let them know that you are depending on them to make a timely payment and if need be, you would stop by and pick up a check.
If you do enough commercial business, there will always be the client that will try to use you for an interest-free loan to finance his business by delaying payment. Here are some common excuses: Your invoice was never received; the invoice was for the wrong amount; there was a problem with your requisition and it has not been signed off; there is work that still needs to be done; you missed the cut-off for this month, it will be in next month’s check run; I thought we mailed that check; the owner shorted our requisition, so all of our trades are being paid at a rate of 50% this month; yes, I know I signed off the job as complete, but I have to have corporate approve any payment over $25,000.
And it gets worse. Some just don’t pay and don’t bother with excuses and outright lies. “Send me another copy of the invoice and I’ll see what I can do.” When you get the feeling they’ve lost interest in you, then the smartest thing to do (if your state law permits) is to file a mechanic’s lien against the physical property. You generally have either 90 or 120 days to file a lien from the end of the month in which work was last performed. It is best to use an attorney for this; frequently, an adept attorney that specializes in collection can be your new best friend when a lot of money is at stake.
Depending on the circumstances, a nationwide collection company that specializes in commercial collection can be a cost-effective way to deal with deadbeats. Accounts receivables over 120 days past due are worth about 40 cents on the dollar and drop to 25 cents when over 150 days old. Catch them while they are fresh and you have a chance to collect without a substantial write off.
Maximize your cash flow and avoid collection problems by making sure you understand your risk, nail down the best terms you can with your supplier, follow up with timely billing, and find out quickly if you’re going to have a problem.
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