When managing your accounts receivable, do you have a one-size-fits-all approach to collecting late payments?
Perhaps you shouldn’t.
Every customer situation is different, and we advise dealers to be strategic about how they collect. Specifically, dealers should make efforts to properly assess the true risk of not getting paid and also understand the relative profitability (or lack thereof, sometimes) of the customer. Putting those two pieces together gives you a simple, powerful framework for how you should approach collecting.
To understand which customers are in trouble, pull credit three times a year and look at trends that matter. There are obvious warning signs to look for, such as delinquent accounts with other dealers. A more subtle one might be a contractor whose borrowing amounts are steadily creeping up to historical highs. To understand the true profitability, go beyond looking at gross profit dollars to factor in a customer’s share of your delivery, administrative, borrowing, inventory and other costs. It’s important to recognize that someone regularly paying you slowly could be costing you 2%-4% more than your average customer. That can often make the difference between a customer being profitable and unprofitable.
Do this analysis at least once a year and then chart where your customers are on a 2x2 risk vs. profitability map, shown at the top of this page.
Indicate risk on the horizontal X axis, and indicate profit on the vertical Y axis. Now start placing customers in the proper square, depending on their buying and paying habits.
Escape. Customers in the lower left quadrant quickly become customers you want to escape from, as they are at risk of never paying you back. e.g. negative profitability. Corrective actions you can take include moving them to COD status, assessing fees (especially for difficult deliveries), preparing and filing liens, and considering a collections agency if they are delinquent. With these actions, you are OK if they continue to buy from you, but they’ll no longer be doing so on your in-house account (read: on your money).
Protect Against. These are customers who are 60 days late and bumping into a pre-set credit limit, yet looking to buy more. They show warning signs of being high risk. As such, you need to monitor them regularly, such as by pulling a credit check monthly. It’s also time to ask them to pay down their line. The key: Don’t let the situation get worse.
Address. These are customers who you are confident will pay you … but you just don’t make money on them. Address this by moving them to higher-margin products or be willing to assess and collect fees when they are late. Figure out how to earn more margin here.
Love. These are customers you want to show affection, because they are high profit and low risk. These are the ones you’ll go the extra mile for, make a challenging delivery without charging extra, or even waive fees you normally charge others.
A one-size-fits-all approach is straightforward and easy to execute, but there is a better way. It takes only a little upfront effort to understand customer risk and profitability. The benefits are worth it.
