I was talking to a lumber guy three years ago, just about the time the Great Recession was over and we were seeing a bit of light at the end of the tunnel. He said, "Hey, I finally figured out how to make a small fortune in the lumber business. You start with a big one!” It’s an old joke and kind of a sick one. Many of us have lived through the recession and even though it's better nowadays, the scars are still there. We don’t have a big fortune to back us up, so what do we have?
One of the biggest and most important facets of our business would be our accounts receivable. It’s all that money we "loan" folks when they buy our materials, and (hopefully) pay us for them about forty days later. In our case, and now that things have grown back at a fairly rapid pace, several million dollars are floating out there at all times. Collecting that money and turning it is no different than managing our inventory. But collecting is also an emotional and very fluid part of our business. If we're doing our job properly by competitively pricing our goods, providing tons of service, and staying involved in community activities, then the collection of that money, our life’s blood, can be sensitive and, frankly, not easy.
One of the things we learned quickly as the economy was sliding down was that some of those draws builders were getting were actually paying for a job four jobs back, or even much older jobs. Say Joe, who you've known for many years, is suddenly telling you he can't pay you right now, but 30 days from now, there will be enough draw money, and he'll catch you up. But when you tell him you really need your money, he gets huffy and in no uncertain terms lets you know that if you start forcing him to pay, you'll greatly hurt him, and very likely put him out of business. So, you go along with him, and six weeks down the road, he hasn't caught up and those scary owed numbers are even worse.
What we had to do in our case was realize that the emotional element had to come out of collecting. We put most of our customers on zero leeway. This means that whatever was due by the 10th of the following month was due. Period. If they couldn't pay, they were immediately put on a credit hold. Then, if they didn't make at least a decent good faith payment, we started putting a lien on jobs. We set a new norm for a lot of our builders. Pay for specific job with the money earned from that job, or it ain’t going to work. It turned out our customers are clever, too. They'd get the picture and start buying from a competitor because there's always someone willing to open up a new account. When the customers finally got their draw, they'd pay us, not their new supplier. They could only pay this way for so long, so they'd either figure out the right way to survive or they’d be permanently gone.
So, now times are better. Builders have good, profitable contracts and are making money, so our policy has eased up, right? Wrong! This is one protocol that we have kept solidly in place and will keep in place for a long time. Builders, suppliers, banks, and everyone our company deals with understands the need to adhere to this new policy. Since we are, and will continue to be, a bank to our customers, we decided the best management practice was to act just like a bank. Being tough and surviving is not a bad feeling at all.
Good luck on your collections.