In this “slightly improved” re-post from June 21, 2017 , we talk about what is nobody’s favorite topic but one of the most important aspects of running a successful business.
We all love to count our customers and we all love to count the bags and pounds. You have X number of customers and you are roasting X number of pounds. But at the end of the day, the month, the quarter, the year, the numbers that count if you want to keep doing what you’re doing are revenue and profit. It doesn’t matter if you roast a thousand pounds a month or a thousand pounds before breakfast, if you’re not being paid for all that coffee you’re swimming upstream.
Specialty coffee roasting businesses, often if not always, phoenix out of passion. Ask 100 small to medium specialty coffee roasters about why they roast coffee and you will receive 99 answers that have nothing to do with money.
But it doesn’t matter how passionate you are about coffee, you have to get paid. Getting paid and making a profit is the difference between a hobby and a business. Fortunately, most people pay their bills, most people pay you for your coffee in a timely manner. Unfortunately, just enough people don’t pay their bills in a timely manner that enough of them on your books can create a significant drag on your growth (and your time).
For most coffee roasters, the bulk of customers are retailers and retail can be tough and uncertain. Cash flow can be irregular. In small roasting companies, whoever is responsible for accounts receivable (AR) is likely responsible for several other things. So, it’s no surprise that roasters often have a substantial percentage of receivables past due, as much as 30 percent.
If more than 15 percent of your receivables are past due, it’s time to take a look at some of your AR practices and consider a few ideas. There will always be accounts for which you make exceptions for any variety of reasons, and that’s okay, as long as the exceptions don’t become the rule.
The Beginning is the Most Important Part of the Work
Acquiring a new customer always feels good, especially when it’s the result of a sales process, when it’s business won. And it is business and you never need to apologize for acting like a business person. At the beginning, “terms” (i.e. giving a customer time to pay for coffee that has already been delivered) should not be your default. Your expectation and assumption should be that coffee will be paid for when it is ordered, and this is the arrangement that should be presented to potential customers before you close the sale.
If a new customer requests terms, they are asking you for credit, and they need to complete the same type of paperwork they would complete in any instance where they receive goods and services prior to payment. Your accountant or online resources can help you understand what this paperwork should include; the paperwork is largely for purposes of collections, and the whole idea is not to reach that point … to get paid. I don’t know if it’s irony or paradox, a little of both or none of either, but the more prepared you are to go to collections if necessary, the less likely it is that collections will be necessary. If your customers feel like they are completing loan paperwork, it’s because they are completing loan paperwork and you are communicating that you operate a business and take getting paid seriously.
So, aside from all the proper legal paperwork for customers requesting terms, it is very important to learn, before coffee is ever delivered, the name and contact information for the person at your customer’s company who schedules payables and the person with primary responsibility for signing checks (or approving payment by some other means). At a small company, they will likely be the same person, but the larger the company the more likely they will be to implement best practices in terms of accounting, a “separation of duties,” which means the person who schedules payables (what bills they are going to pay and when) and the person who signs the checks, would not be the same person.
You need to know them both because when payment is not received in a timely manner, it is probable the hang up is with one or the other person. The person who schedules payables will, very generally speaking, decide what bills to pay based on a few things, the most basic being: When the bill is due, how much money is in the bank, and the consequences of non-payment. The person signing checks will sometimes have information the person scheduling payments might not have, such as upcoming expenses that have yet to be invoiced but will affect cash flow.
You want to know both of these people, not only so you know who to contact when necessary, but to make their decision to delay payment as personal as possible (which is not the same as “making it personal” when it’s time to collect, which you want to avoid). It’s true that for many of your customers, this will be one person who is also the owner and also still pulling barista shifts, but whatever the case, get to know them so they see your face or hear your voice when they’re deciding whether or not to put your invoice on the “wait” pile.
Beware of a customer jumping roasters. If a potential customer contacts you because they want to leave their current specialty coffee roasters, a company you know to have quality coffee and service, you want to try and understand why, apart from any ego-driven assumption that your coffee is simply better. If they want to change to someone more local or offering a wider variety of coffee or distributing a wider variety of allied products, reasons like these make sense. If they complain about the other company’s coffee or service and you’ve never heard these types of complaints before, proceed with caution. They could be leaving because they owe the other roaster money.
Age is (Not) Just a Number
So you’ve decided your company will offer terms, allow customers to pay for coffee at some point after it has been delivered. And of course this means 30 days from the invoice date, right? What? Why? Research indicates invoices with a due date 21 days out from the date of invoice are more likely to be paid on time. So, when your customer asks for terms, let them know you’re willing to provide terms (provided they complete the paperwork) but your company works on a 21 day billing cycle. More importantly, that’s the last time you talk about days. Your invoice should not use accountant language like “Net 30” or “Net 21.” Your invoice should have a due date, the date payment is due and after which will be considered past due. Once the payment is past due, subsequent invoices should use the words “Past Due.” Do not offer what amounts to an extension by adding, “Please pay by…” Payment is either due or past due, period.
Under no circumstances should you include aging on the invoice. You’ve seen (and maybe used) invoices that include the age of the past due amount at the bottom, 30-60 then 60-90 then 90-120. The idea is that a customer can see how late their payment is but the result is that customers may view these as options. After all, if you show a 90-120 box on the invoice, that must mean payment can go that far out and everything will still be okay. That’s not true. In fact, it’s not true by 60-69 days because…
There is No Maybe, Pick Up the Phone
Whatever your terms, when a payment is late you have to let your customer know that you noticed their payment is past due as soon as possible, ideally no later than five days of payment being late. This requires vigilance and discipline, but you have bills to pay too so managing AR should be a priority. When payment is a few days late, call your contact. DO NOT tell yourself, “It’s only a week late, that’s not so bad, I will call if they don’t pay after their next delivery.”
Remember the reasons people schedule payables. One of the things that people consider are consequences for not paying. If someone is looking at your invoice and thinking, “I can stretch this another two weeks and nothing will happen,” they’re not going to pay you for another two weeks. If they are looking at your invoice and thinking, “If I don’t pay this on time I’m going to get a phone call,” then you are a higher priority. Sure, you can send an email, but it won’t be as effective as a phone call. And remember, this is not a collection call, it’s a friendly reminder for a customer you would like to keep buying coffee.
The Larger They are, the More it’s Their Call
Large companies understand their value to vendors and will sometimes dictate their terms (e.g. they may insist on net 45 or even longer). They do this because they can, and if you want the business you accept their terms. They may also have other procedures you need to follow that essentially shift some of their administrative work to their suppliers. Again, they do this because they can and because their operations are complex. These procedures can be annoying but they are the price of doing business with the big kids. In terms of getting paid, be sure to follow their instructions closely. Don’t give them any bureaucratic excuse to delay payments.
But once the terms are established and you follow all the procedures, everything above still applies. You won’t have the same type of leverage with a grocery store chain that you do with a coffeehouse, but you should treat them the same in terms of getting paid, nevertheless.
The Problem Child
No matter how diligent you are, some customers will always pay late and always have an outstanding balance. The first tactic for these “slow pays” is to apply late fees. Late fees need not be substantial to motivate payment. Just seeing the amount due tick upward is motivation. The grace period, if any, from due date to when late fees are applied should be short and applied at intervals that are shorter than the billing cycle (i.e. late fee is applied every 7 days after past due date). You can always agree to waive the penalty if they “pay today.” Make sure all these terms are not only spelled out in writing for new customers but reinforced verbally.
For customers with a growing outstanding balance, you can place them on payment plus (COD plus for orders you deliver), which is the cost of the current order plus some extra to apply to their past due balance. If at all possible, customers attempting to order more coffee while they have a past due balance should have to speak to someone other than the person from whom they normally order coffee. Again, this is not collections if they are only one billing cycle behind, but it should be clear that if they don’t pay their bill they’ve moved outside the realm of their regular customer service contact. It’s a real challenge in small companies, but ideally neither sales people nor customer service people should be speaking to a customer about a past due balance. Do everything you can to make paying late feel not normal.
Be the Customer You Want to Have
Finally, and perhaps most importantly, be diligent about paying your own bills on time. I’m not saying this because we sell green coffee to roasters (and like to get paid). It’s simply human nature. If you are not paying your own bills on time, you’re less likely to insist on being paid on time. It’s difficult to call a retailer to talk about why they haven’t paid you when you just got off the phone with one of your suppliers who is asking you the same question. On the other hand, if you can point to your own company as an example of responsible business practices, it makes it much easier to expect the same from your customers.
Header Photo by Nathan Dumlao used with permission under Creative Commons.