By: Jeff Heybruck
Net 30? Yeah, right. AR from large clients can be tricky.
A common refrain we hear from small business clients is: “the larger the client, the longer the AR.” We often find ourselves asking why, but the unfortunate answer seems to be: “because they can.” Large companies often wield significant market power and may dominate their industry or sector. This dominance can sometimes lead to a sense of entitlement or a belief that they can dictate terms to their vendors, including invoice payment terms. They often prioritize their own cash flow management over adhering strictly to payment terms. They may delay payments to vendors to maintain liquidity or to invest funds in other areas of the business.
The next logical question is: is there anything our small business can do to limit the damage? The answer is a qualified “yes.”
The larger the client, the longer the AR
Clients With Significant Leverage Can Be Problematic
Closing a large client can be intoxicating to the sales team. Whether it is gaining a competitive advantage, the prestige and recognition of landing a large catch, or validation of their sales skills, they often jump at the chance. However, it is worth investigating if the sales team is incentivized to hunt for whales at the downstream expense of the rest of the company. There are several potential downsides to be aware of:
Slow Accounts Receivable
In our experience, large companies are disproportionally likely to simply ignore payment terms previously agreed to and listed on the invoice. It is not uncommon to see 60, 90 and even 120 days. They may have entire departments dedicated to Accounts Payable on their end, but this only reinforces the point that delinquent payments are usually by design.
In the construction industry for instance, it’s not uncommon for developers and GC’s hold final payments to sub-contractors until the certificate of occupancy is granted. This means subs who are involved early in the process, such as foundation and steel erection could find themselves waiting well over 12 months before they are made whole.
Renegotiation of Contracts
In particularly egregious cases, we’ve seen large companies engage in a long-term contract with a vendor, wait long enough for that vendor to invest in infrastructure to support the contract, then re-negotiate the contract. An example would be to hire an IT vendor, and wait until the vendor had hired the employees, leased the vehicles, computers and office space, then negotiate the price down because at that point the small business can’t afford to lose the deal.
Sometimes it can be valuable to simply recognize when leverage is transferred or accumulated. Project managers have a keen sense of milestones where significant value is realized. For example, at the end of the design phase the deliverable has tremendous inherent value. As that value is given to the client, leverage is also given. Every business is different, and these value transfers will be defined differently. Small business owners would do well to not only be aware that it is happening, but recognize ahead of time and plan billing around it.
At Lucrum, we’ve seen it time and time again: business owners complain about a customer, yet keep doing business with them. Until they are ready to say no; the customer has all the leverage. Small business owners need to ask themselves whether it is preferable to have an AR that is both large and long, or a smaller but consistent and manageable cash flow.
Until you’re ready to say “No” the customer has all the leverage.
If that large opportunity is still too good to pass up in light of these concerns, be sure to enter into the contract with eyes open and pencils sharpened.
Enforceable Payment Term Boundaries for Small Businesses
One way to protect against these types of examples is to create boundaries and don’t be afraid to enforce them. Being willing to apply the consequences of these boundaries may not change the client’s behavior, but they can compensate the company in the meantime.
Shortening billing cycles in a project can provide check-points, and reduce the amount of risk at any given point. Monthly billing, or progress billing based on milestones is often our first recommendation. This also provides an early indicator of how quickly the client will be expected to pay.
By incorporating interest into the original contract, delinquent AR can be offset by additional revenue. Converting the same calculation into a positive may incentivize the client as well. For example, rather than presenting this as a punishment for late payment, offer a percentage discount for quick payment (as long as the net payment is the same).
Similar to the concept of interest, sometimes it is easier to calculate a simple fee amount. For smaller or more frequent invoices, this can be a preferred method for accomplishing the same goal.
Other Punitive Measures
Withholding future work or pausing existing service can often motivate recalcitrant clients who would otherwise be unmoved.
- Pro Tip: For businesses where scheduling and project management is done in house, it can be possible to control when large milestones are finished. Wise managers will create work schedules with this in mind, because it can shift the balance of leverage, giving the small company a powerful bargaining chip in the likely event of late payment. For instance, withholding key functionality of a website until the final milestone can incentivize the client to pay quickly. In the unfortunate event that a client is delinquent, withholding future value can be a motivator without being overly aggressive and escalating into a larger conflict.
Get It In Writing
Whether it’s retainage releases, payment terms (days) or other terms that are important to the small business owner, be sure it’s clearly worded and spelled out. This doesn’t mean the big company will automatically honor it but at least the language makes it clear they are in the wrong.
In the end, it comes down to the value of the client relationship. Large revenue jobs do not always mean large profits. Imagine a big GC routinely withholding retainage as a way to get extra, change order-type work done for free. Or a vendor isn’t being paid for marketing services until the 60-90 range when it’s clear that invoices are due in 30; can the marketing firm backfill that opening?
Large revenue jobs do not always mean large profits.
In light of this reality… often the best way to solve slow paying clients is to avoid them in the first place. Saying “No” to a bad deal is a skill that’s hard to learn for business owners as well as sales teams. At Lucrum, we often encourage clients to identify bad deals early, and avoid them like the plague.
Consider the impact of a bad deal
Cash Flow Interruptions
As explained above, slow paying clients can dramatically affect cash flow. This can tie work schedules in knots, and hamstring the ability to take on other jobs without the cash to execute that work.
Large clients that manipulate vendors with retainage often try to get additional free work at the end of a job. This can have a devastating effect on margins. Not to mention the time and effort put into collecting payment, and dealing with a manipulative client.
Having to hold a client accountable for payment can cost a significant amount of relational capital. This puts future jobs with that client at risk.
If the relationship is damaged severely in the process, the client will likely speak long and loud about it to anyone who will listen. The damage to the brand in the marketplace could have impact long into the future.
Having no deal at all is better than having a bad deal.
Solving this common issue is a multi-pronged approach. By employing these strategies and maintaining open communication with your client, you can increase the likelihood of negotiating faster payment terms for good clients. By carefully tracking profitability by job and by client, you can have the insight needed to identify and avoid bad deals altogether. This underscores the importance of having accurate and actionable data. If your company needs help with that or with implementing effective AR strategies, reach out to Lucrum. We can help you have Confidence In The Numbers.