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Last updated: Oct. 8, 2021
Originally published April 23, 2020
It’s hard enough to manage receivables normally. What about when everyone is struggling?
Timely invoicing has always been a critical part of running a business, but with COVID-19 wreaking havoc on company cash flows, getting paid sooner than later could be the difference between staying open or having to close. Unfortunately, you’re likely not the only company that wants to speed up payment from a supplier or client. The business that owes you money may also be struggling and can no longer pay as quickly as they did before.
It’s a tricky situation, says Robert Soroka, a professor at Concordia University’s John Molson School of Business in Montreal, especially because both sides know how hard things are right now. “Everyone’s going through a difficult time,” he says. “It’s very possible that you’re having a harder time than the person who owes you money (or vice versa).”
How can you manage your receivables when money is tight for everyone? Here are five ideas.
Consider a Payment Schedule
There’s a good chance that at least some clients will see your invoice and say they can’t pay. Before getting frustrated, or assuming you’ll never get your money, think of ways to help them out, even if it may mean some of what’s owed comes to you later than you’d like. “You don’t need to say, ‘Yes, we’re in a crisis situation; no problem. Pay me later,’” explains Soroka. “Instead, try asking, ‘When could you pay me? Can we create a payment schedule?’”
Depending on the financial position you’re in, you may be fine with a client spreading out your payment over the next six months. Even asking for a more specific payment date – maybe they can pay in two months, when a loan comes through – is helpful. If you know the day that cheque will arrive, even if it’s late, you can factor that into your cash flow projections.
Get Creative With Terms
Now’s the time for companies to help each other out, especially if your company is working with small businesses. Consider extending payment terms if you’re able to, but give your customer an incentive to pay your bill as fast as they can. “Perhaps it’s time to create more attractive terms and conditions, or establish a longer payback period, or give a temporary discount if you’re not providing the same degree of service,” says Soroka.
If your payment terms are net-30 days, for instance, maybe tell a client that they can pay in 60 days, but if they pay within the month they’ll get 2% off the bill. However, be careful about slashing a bill in half outright – that should only be done if you think you’re going to get nothing, explains Soroka.
Be Transparent
Money is always an awkward conversation for business owners to have with clients, but now’s the time to have those honest discussions. If you need to get paid sooner than later, tell them that – especially if you’ll have to shut your doors because of late payments. “This is not the time to be shy,” suggests Soroka. “If your business is in a precarious position, you may want to convey that you might not be around if (you don’t get paid).”
At the same time, reach out to your customers to see how they’re doing financially, and if they need any help paying. You don’t have to wait for them to bring up what will undoubtedly be an uncomfortable conversation. They’ll appreciate your transparency and honesty, which could make it easier to come to a mutually beneficial payment arrangement. “I would have a heart-to-heart discussion about costs,” says Soroka.
Hold Off On Late Fees
Many companies add late fees to bills that haven’t been paid. While that may have been fine in pre-pandemic times, doing that today could be seen as aggressive and insensitive, explains Soroka. “Those types of penalties and sanctions are going to be perceived as very negative and detrimental to future relations, plus you probably won’t even get them,” he says. “I would strongly advise against using them.”
If you’ve already charged late fees, tell your client you’re removing them from your invoice. In this environment, you want to work together rather than be adversarial. “Any type of business relationship along the supply chain should be collaborative, so avoid confrontation and be sensitive to your partner’s needs and concerns,” he says.
Try Some Tough Love
If you’ve exhausted all other options and you still aren’t getting paid, then you may, unfortunately, have to start talking tough. If your client still wants to use your products or services, you may have to say no until they take care of their balance. You may also want to tell them that if your work with them is suspended, the rate they’re paying today may not be what they’ll get later. “If someone says they won’t pay you, they’re essentially telling you they’re suspending relations with you,” says Soroka. “The buyer-seller relationship is going to cease.”
Enlisting a collections agency or a lawyer is usually a final option in good times, so you want to be careful about how you’re using one today, when everyone’s struggling. But, at the same time, if your business is significantly compromised by this bad debt, then getting a third party to push that person may be needed. “You may want to impress upon your client the urgency of the situation, especially if your client is choosing to prioritize repayment to other suppliers,” says Soroka. “In these instances, you may have no choice but to enlist the aid of collections specialists, but this should really be a last-ditch attempt.”
No matter what the situation may be, you’ll need to collect any amounts owing at some point. You’ll do what you need to do based on how badly you need the funds, what situation your clients may be in and whether you can keep the business going with the money you have.
However, keep in mind that this crisis will end. Ask yourself, what kind of relationships do you want on the other side? “You must remember that these are unprecedented times, necessitating some empathy,” notes Soroka. “Once this period is over, your customers will remember how they were treated during these times.”
Contact FBC
Have questions about COVID-19 programs for Canadian businesses? Unlimited consultation related to tax matters is a key benefit of FBC Membership. We’re offering a free consult where we get to know your business and determine next steps on saving you time and money. Request a consultation online.
You can also visit our COVID-19 Resource Centre for the latest information for Canadian business owners.
Disclaimer: The material above is provided for educational and informational purposes only.
