Offices & Operations mentor Charles J. Bodenstab responds:
There is no magical answer to this classic lament. An article I once wrote for Inc. magazine, "The Receivables Challenge," covered a series of steps to take to stay out of big-time trouble in the receivables area. On the specific issue of excessively late-paying customers, I'd offer the following advice.
There is always the age-old technique of offering a discount if the customer makes his or her payment within a specified time frame (e.g., 2% off if paid within 30 days). The trouble with this approach is that you must first raise your price by, say, 2% in order to avoid gross margin erosion. The market may balk at this image change, even though it does not represent a true price increase to your good, paying customers.
Or you may have a customer who simply ignores the rules and responds by saying, "We don't pay penalty charges!" When this has happened to me, I have asked the customer if that's how they respond to their bankers.
Frankly, I personally favor an approach that requires a certain market environment -- and some guts -- to execute. With this approach, you set a reasonable credit limit for a customer based on size, financial strength, and payment history -- and then stick to it. For that to work, you must adhere to a firm policy of not shipping new product if the credit limit has been exceeded or the customer is past due. I realize that that is tough, since we all want the business and this kind of hardball approach can jeopardize the customer-supplier relationship. But you must try to remember that as a supplier you offer something of value and have a little more power than you may realize. And, of course, there is the question of the true profitability of a slow-paying customer, to say nothing of the financial risk inherent if you have a large receivables balance.
Then again, you could always resort to begging and pleading.
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