Late payment behavior increases DSO. If a large percentage of your customers are late payers, they can cause DSO to expand enough to snare you in a cash trap. Collection bottlenecks can make reducing DSO to get out of a cash trap a real challenge, especially if you do not have automated accounts receivable and collections. That is why deciding how to handle the late payment behavior is very important.
When considering how to deal with late paying customers, it is first necessary to establish that are several types of late payers to consider including:
- Occasional late payers – Rarely pay late. Reminders usually resolve.
- Chronic late payers – Frequently or always pay late from a few days to 30 days or more. Reminders are not effective. Collection calls sometimes required, but pay eventually.
- Uncollectable accounts – Will have to be referred to a collection agency or attorney.
The steps you take to handle late payment behavior should target chronic late payers. While chronic late payers eventually pay, they usually account for most of the DSO that is in excess of your KPI goal.
Chronic Late Payers
Customers are chronic late payers for several possible reasons including:
- Accounts payable policy – Customer’s AP policy may be to pay in 45 days even though your terms are Net 30 Days.
- Accounts payable procedures – Customer may pay invoices received by the 15th on the 1st of the following month. If your terms are Net 30 Days, this can result in you being paid up to 15 days late.
- Cash management – Some companies always pay late to maximize AP as a source of cash. Presumably these companies believe that paying late will not harm their business relationship with you.
If you do nothing to reduce chronic late payers, it will be very difficult to control and reduce DSO. There are steps that you can take to help rein in chronic late payers.
3 Tactics to Deal with Chronic Late Payers
- Late payment fees – Although they can be viewed negatively by customers and sales people at your company, they can be effective in reducing late payments if properly administered. Make sure your sales people back you, otherwise you will not be paid any earlier and end up writing off the late payment fees. Explain your late fees policy and procedure when you onboard a new customer. It will help to reduce late payments and disputes.
- Cash discount – Consider offering a cash discount for early payment. It will need to be attractive enough to change late payment behavior. Cash discounts can be costly so carefully weigh the costs versus benefits.
- Late Payment Sequence – If you have automated accounts receivable and collections, create a Late Payment Sequence to maximize your collections in the most efficient manner. Automate reminder notices and collection letters and provide a customer portal to remind your collectors of promises to pay. Make sure your customer portal includes online payment options and the ability to report disputes.
Late payment behavior can dealt with efficiently and effectively using the technology available in automated accounts receivable and collection. With automation of your AR sequences your AR team will have the tools to stay ahead of the curve on DSO.
The key to successfully automating accounts receivable and collections is to work with an experienced software partner.
Lockstep Collect is a market leader in cloud-based credit and collection platforms. Lockstep Collect can help you to implement the technology applications you need to reduce and control DSO.
If you would like to learn more about how you can benefit from automating accounts receivable and collections, please contact Lockstep Collect at www.lockstep.io.