Tales from the credit front-line
This article first appeared in MG Business in October 2008
A couple of self-employed friends of mine, one a tradesman, one an IT person, have talked to me about credit management matters in the last week or two. The good news is that they are both saying that they are still very busy. Both of them are one-man-bands, too small to employ an office person. The bad news is that they're not being paid, and it's partly their own fault. I saw one of them - we'll call him Bill Gates - during the winter and he told me that he was so busy he wasn't getting time to send out invoices. Because he wasn't personally being affected by any downturn in the economy, he didn't seem to understand that times were getting tough.
If you don't bill your customers promptly, you may find that they go out of business; they run out of money; or they lose sight of the value they saw in the work you did. The money that might have been earmarked for paying your bill has been spent elsewhere. If there are disputes, they are harder to resolve, months later. Lots of businesses pay bills at a particular point in the month (often after the bulk of their customers have paid them) so if you send out your bill three months late, it doesn't necessarily get paid immediately. Instead, it probably gets put in the pile and paid in three or four weeks time (at best). Aside from anything else, late invoicing sends a message that you don't really care too much about the money.
I've just called Bill and he has now billed some of the backlog and plans to get to the rest of it next week. Then he's going to sort out his accounting systems, so he bill more easily and quickly in future.
My other mate, Joe the plumber, has a very large client, a business with numerous buildings. The managers of these buildings know and love him; he's reliable, knows the intricacies of each site, and doesn't overcharge. He's always been paid weekly, but last month that stopped.
"I haven't been paid for three weeks," he told me a couple of weeks ago. This was at a time when he had been very busy, bringing in subcontractors on a couple of large jobs and owing what, for him, was a substantial amount to suppliers. I asked what he'd done to sort out the problem and he admitted, "nothing yet. I'm so busy I just can't take the time off to sort it out without letting someone else down." I explained to him that the economies of the western world were in meltdown and this was not a time to let accounts slide. "My subcontractors and my supplier know that I'll pay them when I get paid," he said. But that's not the way it's supposed to work.
In theory his work could be brought under the Construction Contracts Act 2002 (which also forbids pay-when-paid clauses in contracts), if his invoices had included a simple reference to the Act. This would have allowed him to use the mechanisms of the Act to resolve unpaid invoices. However, Joe doesn't know about the Act and it's not really appropriate for this arrangement which depends on trust and goodwill on both sides.
The big problem for everyone in these times (but particularly for overseas bankers) is that no-one knows who is about to go bust. However, in Joe's case the debtor company is very unlikely to fail, but even so, I stressed the importance of sorting this out. We made a plan. He would talk to his main local accounts contact and she would sort out head office.
The next week I saw him again and he told me that head office had decided to change the rules and pay him monthly. He expected in the next week to be paid what he was owed, and he was. Of course, that's not the way a contract - an agreement between two parties - is supposed to work. One side can't unilaterally change the payment terms for work that has already been done. However, Joe is now in a difficult position. If he takes a hard line, he risks upsetting the client and that would be a disaster for his business. The better head office understands his position, and the good deal its getting, the more likely he is to get a good outcome.
A couple of other stories: first, I read in the NZ Herald the other day a story entitled "Desperation, suicides as foreclosures mount". This talked about people in the US killing themselves and sometimes their families and pets when their houses were repossessed. I don't want to put ideas in debtors' heads - it's only money, guys, life goes on - but I've talked to a few creditors over the years, particularly bankers, who have had clients kill themselves. This is a time when credit staff have to be extra sensitive. Keep yourself safe, and remember that sometimes you have to take the time to get people to talk and listen to their problems, even when you're busy, and even when it's not going to help collect your debt.
One last story: I was at a barbeque recently where a young, not very bright, half-drunk woman was telling me that she had given up smoking (a pack and a half) three weeks ago and was saving herself $200 a week as a result (and benefiting her health and that of her three-year-old daughter). However, she was also saying how hard it was not to smoke when she drank. Conquering addiction is hard, and it was obvious that she was starting to justify (to herself) having a cigarette that night. I said to her, "I can tell you are a strong person who is going to hold out." She paused for a second, straightened her back and said, "yes, I am."
If you want to encourage someone to stick to their plan, try painting a positive picture of the way the world sees them (even if it's not strictly true). We're all influenced by the way the world sees us. If you tell someone, for example, that they are the sort of person who pays their debts, they are more likely to see themselves that way and more likely to pay. No solution works 100%, but in this case, the young woman concerned hadn't given in to her addiction by the time I left.
Peter Hattaway - www.hattaways.com - is a director of Hattaways, specialists in credit management training and consulting. This article is not legal advice.