When you hear the word “collections” it conjures up images of nasty warning letters, harassing phone calls, Repo Man and maybe a scene out of Goodfellas. Those types of collection methods, legal or not, might be part of the collections process at companies that sell products. However, there is an entirely different dynamic when it comes to collecting payments for businesses that sell services ( i.e. SaaS services, streaming movies, mobile services, etc.)
There is a delicate balance that service providers live with ‒ collecting timely payment or upsetting the customer, which may lead to reduced business or even the loss of that customer. The challenge companies face in applying pressure to their customers for payment is further complicated because the customers can easily switch to a comparable service. Mastering the collections tightrope in order to grow and still be financially solvent is often the difference between success and failure.
Sales vs. Collections: The Battle Between Growing Revenue and Cash Flow
Unlike many other industries, service providers cannot use large numbers of low skilled staff to “dial for dollars”, reading off a script and be successful, especially in the B2B world. The goal of the service provider’s collectors cannot be only about getting payment for that one past due invoice, but rather they need to understand that they are part of the relationship with the customer and the ultimate goal is to get the customer to pay for its on-going business. Therefore, these companies need collectors who understand their business and their customers, who are excellent communicators and are able to work with customers to resolve issues in order to remove the barriers to payment.
These companies need their collections team to be able to determine if the customer will really make payment and when. But figuring this out can take time and during that time the customer continues using the service and increasing how much they owe thus increasing the company’s risk and exposure. Service providers get into trouble because of their unwillingness to stop service to a customer. While the company is focused on growing the business, the risk increases. Eventually the amount owed by the customer can become so large that the service provider may have cash flow issues and then can’t afford to cut off that customer and chase the money owed through legal action. The company also can’t afford to lose the customer and all the services they “buy”. In many cases, the company goes out of business because they are unable to pay their bills due to a lack of cash. Sometimes the company’s only chance for survival is to negotiate a reduced amount to be paid by the customer and minimize their loss. In either case, the damage is done and the company suffers for taking too much of the wrong kind of risk.
There are some things that can be done to manage the growth/collections dilemma even at the smallest companies who have Fortune 100 companies for customers:
- It all starts at the top, with the company culture and values established by the CEO to stress payment and adherence to the terms in the contract.
- Customer contracts should clearly explain the payment terms and requirements, actions and consequences for both the buyer and provider, including the dispute resolution process with defined time periods for each action. The contract should not be ambiguous or silent on these terms.
- As part of the “go live” process, the account manager should review these terms with the customer.
- Consistent and constant adherence to the terms of the contract.
- All nonpayment or delayed payments must be raised with the customer and brought to resolution. Don’t wait for it to be a big amount. If the customer is underpaying a $10,000 invoice $500 every month (they are taking their own discount), it needs to be addressed quickly. Eventually the amount owed will become big enough to be a problem.
- Hire and train collectors who understand they are building relationships and make them part of the sales/account management team for those customers. Good communication and coordination between collections and sales is critical to success. You never want a sales person going to a customer to sell additional services only to have them walk into a customer that just received a collection warning letter or worse. You also never want a business plan that forecasts huge growth next quarter based on customers that don’t pay for service.
There is no simple solution but establishing and living by a policy that includes the collections team as part of the customer relationship building team gives a business the best chance to grow with customers who actually pay for their service.
This post was originally published on the Receivables Exchange. Find out more info on the Receivables Exchange and how to turn invoices into cash by using accounts receivable financing to generate working capital.
About the Author:
David Sumka has been revolutionizing early stage and emerging technology companies for more than 20 years through periods of hyper-growth, international expansion and three successful IPOs. Most recently Mr. Sumka was Senior Vice President, Operations at IntraLinks, a SaaS provided business collaboration service. Prior to IntraLinks, Mr. Sumka has held executive positions at ESPN, Arbinet, Incom, MCI and World Telecom. Mr. Sumka is recognized as a thought leader across the technology industry and co-invented a patented payment and credit monitoring settlement system. He has spoken at industry conferences throughout the US and Europe, authored blogs and white papers and has been published in numerous trade journals.