What the #^$&!

If someone said this to you (with a straight face) would you move forward with a business contract?  Would you agree to commit your valuable time and resources to provide a service or manufacture a product for them?  No way!

What if they said to you, “You’re hired, but I’ll pay you 6 months late.”?  Hopefully, the answer would still be a resounding no.  You’ll work with them once they have the funds to pay you, not before.

Yet many small business owners make this very mistake and don’t even know it!

Find out if you’re a Payment Pushover

I’m constantly surprised at how many people are Payment Pushovers.  Even more surprising to me is the fact that they have no idea how they are failing their business and their bottom line.

Testing your Payment Pushover Status

Here are two quick tests you can do any time to check your Payment Pushover Status.

Pushover Status Test #1

You will need the following information:

  • Accounts Receivable balance – The total amount due to you from your customers for work already performed.  For our example, we will assume $4,000.
  • Credit Sales for the past 12 months – The total amount of business you sold on a credit or invoice basis in the past year.  Include all sales, even those who have a zero balance due.  We will assume $20,000 for our example.

The formula is (Accounts Receivable) * (365) ÷ (Credit Sales)

Using the numbers above, we get (4,000) * 365 ÷ ($20,000).  That equals 73.

What does this number tell us?  On average, it takes your business 73 days to receive payment on a credit sale.  So, is that a good or bad result?

It depends on your standard terms.  If your clients are supposed to be paying within 30 days, this is very bad news.  It means that you are indeed a Payment Pushover.

However, if your standard credit terms give the client 90 days to pay, you are doing well.  In fact, on average, you are getting paid faster than your contract requires.  Good job!

(FYI, in finance circles, this is commonly referred to as the Collection Period).

Pushover Status Test #2

What is the total amount of your receivables that are older than 12 months?  In other words, how much money is owed to you for work that was completed more than 12 months ago?

If your answer is anything other than zero, you’re a Payment Pushover.

Being a Pushover costs you money

How?  Let me count the ways.

  1. If they never pay their bill, you did all of the work for free.
  2. When someone pays late, you are making them an interest-free loan.  Hey, I need some money; will you make me an interest-free loan?
  3. If they pay late, you may not have enough free cash in the interim to execute part of your business plan, potentially losing out on a great opportunity.
  4. If they pay late and your cash flow suffers, you may need to take out a loan at high interest rates just to meet your obligations.

Chasing someone down to get paid costs you time and resources, particularly if you need to use a third-party collection service to get your money.

Lose your Pushover Status now!

The cold, hard truth is that getting paid in a timely manner is your responsibility, not your clients’.  Here are some easy tips to lose this unwanted status now.

  • Invoice in a timely fashion.  People really do fail to invoice immediately.  Check your books; have you processed all of your invoices?
  • Update your contracts.  Spell out clear payment terms, including penalties for late payments.
  • Don’t give credit to everyone.
  • Have a system to track your receivables.  I bet you have systems to track leads, business won, and status of client work.  Why wouldn’t you have one for getting paid?  Every month, you should do the Pushover Status Tests.  Also check that all invoices due have actually been issued.
  • Stop doing work for people that are past due.  This is another phenomenon that continues to surprise me: People doing work for companies that still owe them money from services performed months (even years!) prior.  Stop. Work. Now.  Tell the customer you will restart the project once they are current on monies due.

Did you just discover that you are a Payment Pushover?  What do you plan to do about it? Or have you successfully avoided this status?  What tips can you share on how to keep your receivables under control?