Most business owners recognize that critical cash flow is a major factor when evaluating the financial health of their business. But very few take the necessary precautions to safeguard against customer defaults. Developing better strategies in managing “risky” clients will help businesses protect their own cash flow while saving valuable hours during the “follow-up” process.
David Taylor, Charman & CEO of OnGuard, a credit management software, notes that most “red-flag” clients tend to exhibit a few telltale signs:
1. Fluctuating Gaps Between Payment Indicate Problems with Cash Flow
Customers who may be facing financial difficulty tend to pay the first handful of invoices promptly to establish some credibility, but then timely payments tend to dwindle off. If there’s a wide range in the time it takes a customer to pay individual invoices, it may be an indication that they’re in financial trouble.
2. Re-Requesting Invoices
Customers who repeatedly re-request invoices already sent may be stalling for time. Stall tactics are often indicative of a cash flow problem.
3. Querying of Invoices
Does a client have a million questions about a simple service provided? Is the rate or amount of time billed constantly in dispute? The querying of invoices might be another stall-tactic used by the struggling client.
Know Your Client
Your clients are the lifeblood of your business, so it follows that getting to know them—and some of their more bizarre payment practices—can help you to develop a strategy to deal with late payments before they start to affect the health of your business.
Software solutions allow businesses to construct a detailed profile of each customer, including payment terms, behavior, and queries raised. Businesses can tailor their own parameters when monitoring customer behavior specific to their business model.
For example, when dealing with the customer who constantly queries invoices, an analysis can show the number of complaints raised by the customer over time, and evaluate how many of the queries were proven to be unsubstantiated. When juggling a multitude of clients, using AR software alleviates some of the pressure facing accountants and CFOs to “know” the client and their behaviors.
The Decision to Pull the Cord
There comes a time when the cost of chasing the customer for an invoice outweighs the benefits of keeping them on board. When considering personal relationships, financials, and resources, it’s a difficult decision. Software can further provide an overview of the relationship and help accountants and leaders take the “thinking” out of this decision-making process.
At the end of the day, minimizing risk with late-paying customers is a critical way for every business to safeguard its own bottom line.