As I have written in a prior Blog, a bad debt costs you much more than the actual bad debt. What do I mean? Well, it’s simple math. A bad debt of $12,000 becomes a fixed cost to your business that month.
To recover that expense you need to generate more sales to recover. It isn’t just $12,000 in sales. It is much worse.
If your Gross profit (sales less direct costs) is 30%, for instance, then you would take your bad debt and divide by 30% to get $40,000.
$40,000 is what that $12,000 bad debt cost you! Ouch!
Don’t believe me? Take $40,000 in new sales less 70% direct costs which is $28,000, leaving Gross Profit of $12,000. Just enough to get you back to where you were before you were dinged for $12,000 by that bad customer.
Uncollectible accounts receivable is a very big problem for small businesses. And the problem gets worse when the economy is tighter.
What can you do?
We have taught people that the best way to turn over your receivables more quickly is constant, kind communication. And it starts from the minute your invoices are sent.
The system we have taught is to keep a folder on each customer and document every conversation with your customer.
For diligent, professional accounts receivable managers it works really well.
And right there is the problem…
Bookkeepers Often Do Not Like Making Calls
Most bookkeepers, with some notable exceptions, absolutely HATE collections, and yet, the accounts receivable clerks are often the ones who are bookkeepers doing other bookkeeping tasks.
The last thing they want to do is get on the phone and call people, and especially call them about paying their bills.
Another issue is that the accounts receivable clerk will send emails to customers, and the thread of emails is inside their Outlook, not in any kind of portal.
Of course, a related issue is that if that person leaves (not uncommon) then you lose the continuity of communications with your clients.
Notes in paper files could get lost or mis-filed. This can be partially solved by taking notes in One Note software and share folders with other Team members.
The whole process is just so not automated, and this is a problem because automation – done right – can solve a lot of problems.
At our Outsourced Virtual Controllership firm (we do all the internal accounting for multi-million dollar companies), we are really, really big on automation.
We are so automated that most of our clients are virtually paperless for every single major component of their business – sales/receivables/receipts, purchases/payables/payments, and payroll.
We recently integrated into our powerful suite of software a terrific system for fully automating all communications with customers, in a very human way.
The system was built around the distinction “polite persistence”, the exact words I use to teach how to manage and collect receivables.
What they have created is a system of automation using templates, scheduling, and integration to online cloud-based accounting software (Xero/QuickBooks Online/Sage Cloud), that is stunning.
The templates are all customizable, however the tone of the wording that is used is very personal, kind, and human.
So, what’s the big deal?
The key to automation in this field is to design the emails to sound like you just wrote it yourself, (which you did, because you can customize the emails initially, using their templates).
You create a custom schedule to send them at timed intervals.
They come from your email address, not some email that is clearly automated, like “DO NOT REPLY”. (That’s a big clue to ignore your company’s emails – your customer sees them as machine-generated!).
The system also looks into the accounting software first to update to make sure a payment wasn’t received!
When a payment is received, your customer automatically gets a really lovely thank you email from you.
This part is fantastic! Customers love being thanked for paying you! And no one is doing it, so this adds an awesome customer service level to your business too.
The system will warn you when it about to chase a slow payer, to remind you to make sure your payments are up-to-date. There is nothing worse than asking a customer to pay you when they just did! (This would be another annoying clue that the emails are machine generated. Kind of like what I get from Amazon after I bought something – they will send an email 1 week later for a similar, yet identical product I was searching for).
Also, some systems are designed to send emails at 12midnight, or 7am, which is a big clue that it is a system-generated email, not a personal one, with a very human touch.
You can set the time/day of the week to send your emails. We find Wednesday and Thursdays the best days. (Mondays people are in catch-up mode, and Friday they are checking out for the weekend).
For slow payers there is a timed escalation where perhaps the first 4-6 emails comes from the accounts receivable clerk, then the next one from the Financial Controller, and finally, perhaps, the owner.
Each email sent by you (or anyone in the company) is logged into a customer portal.
All emails that come back from the customer are logged in the portal.
What you end up with is the entire thread of communication related to that customer in one place, including notes you, or anyone else in the company, added.
The cool part is that as long as you reply to the email thread in your Outlook or Gmail Inbox, then all the emails are both inside your email account plus everything is logged in the customer portal.
You end up with knowing the average days receivable by customer (not a blended one by the entire group of customers), and the full history in the customer Portal, so you can make credit decisions accordingly.
You can add credit limits with warnings as well.
Inside the body of each email it includes the invoice number and the amount of each invoice unpaid and attaches the PDF copy of the invoice.
You can send emails with groups of invoices, and/or statements and this is all systematized.
Do you still need to call customers?
Of course, however, now you only need to call the really slow ones and you have this granular level of contact that was done for you, with automation, and no one needed to call until necessary.
You can attach a brief note in the portal to document the call. In this way, ALL communications are logged into the system.
This entire system was designed with creating this with a human touch. And, of course, as in all things, it only works well if thought and care is put into the setup, so it runs seamlessly.
The intention is to always have the automation look perfectly human – that each email looks exactly like what you would say, if you took the time to write a thoughtful, well-crafted email in accordance with your unique style and company culture.
I know that a lot of people cringe at automation that removes the human touch, or the concern is that it eliminates jobs.
My experience is quite different. This kind of intelligent system that has an embedded human touch really can take the grunt work out of receivables collection, that no one wants to do anyway!
As for eliminating jobs, we have found that bookkeepers get elevated to a much higher level. Rather than doing data entry, and making phone calls, they are working on higher level matters for their clients.
They also get to work at designing and managing systems that work.
At our company, our bookkeepers get paid more because they are worth more. Data entry is low value, but there is so much in accounting of high-value that there is real renaissance happening in accounting due to intelligent automation.
It actually has made accounting and bookkeeping rather hip, and exciting. (Now you are laughing, right?)
Thanks for reading…