Carrots and Stick of A/R

Effective accounts receivable management requires a combination of positive incentives (carrots) and negative consequences (sticks). The sticks get most of the attention- a vehicle repossession is a lot more exciting to read about than a small discount for paying via automatic bank draft. Yet in the world of service and technology providers, the carrots are just as important.

Carrots are the happy, positive stuff. A customer will be upset if you stop work, but will be happy to see an option to earn a discount for paying upfront. A customer will be upset if you apply a heavy late fee, but will be happy to see they earned their full rebate at year end.

Sticks have their place, however- especially on longer engagements (you won’t get paid 100% upfront for a 3-year $5 million project). Some customers need a kick in the pants every so often (or repeatedly) to pay you on time- communicating a late fee is a far more effective kick than repeated emails. Setting a hard date for work stoppage can help you from falling to the bottom of the priority list when a customer encounters financial distress. ?

Consider adding the following to your A/R toolbox:

Carrots

·???????? Discounts for paying upfront- the shorter the engagement, the more appropriate it is to offer a discount for full payment upfront. Make this payment due before work starts. It’s really hard to have an A/R problem when you’re consistently paid upfront before work begins.

·???????? Discounts for early payment- there will be cases where you agree to 60- and 90-day payment terms with certain desirable customers. Offer a small discount for payment at least 30 days prior to these terms. This step also allows you to contact the customer earlier in the A/R cycle to encourage them to earn their discount, which is far more enjoyable for everyone involved compared to the contact point when payment is 30 days late.

o?? Pro Tip: be generous when a customer misses the window by a day or two but made a genuine effort to meet it.

·???????? Relationship based rewards- these really don’t apply as much to my client base (B2B service providers at larger scale), but if appropriate to your business there are strategies around loyalty points, exclusive content, and such that you make available to customers who consistently pay on time. Of all things, the best resource I found on this was a ChatGPT prompt of “what are incentives you can provide for customers to pay early”. Hopefully this link works: https://chat.openai.com/c/c91e521e-beae-415a-af71-802876e32e42

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Sticks

·???????? Late fees- late fees work, though they can be a pain to administer. The key is to provide advanced notice that a late fee will be applied, which will often resolve the situation before such a fee actually has to be applied.

·???????? Discount removals- this works in reverse of discounts for early payment above. If you are offering a 5% discount on a large project for competitive purposes, state that the discount is contingent on payment within terms. For contracts with milestone or installment payments, you can have the discount applied against final invoices, with reductions in discount for previous late paid installments. For unit based contracts, one approach is suspending the % discount for subsequent monthly invoices until payment compliance resumes.

·???????? Rebate deductions- include a provision in volume rebate agreements that rebates are only earned on fees paid within terms. Volume rebates should be built to incentivize both volume of business and timely payments on that business.

·???????? Work stoppage- a heavy stick that nobody enjoys using, the threat of work stoppage will give the kick in the pants usually required to motivate payment, and it must be backed up with actual intent. Work stoppage does not have to be comprehensive (especially if you’re providing regulated services or products)- portions of work can be stopped.

·???????? Legal letter- the contents of these letters are beyond the scope of this article, but typically around the point of work stoppage notification is where a legal / complaint letter serves to formally document the delinquency and raise the issue to a broader audience across the customer’s organization. This letter works in conjunction with the tools above, since on its own it will often just generate a response letter not accompanied with a check.

This list is not comprehensive, but provides you tools to improve your A/R and cash flow performance, in a way that’s far more productive for positive customer relationships compared to waiting until a payment is late then firing off a bunch of A/R emails.

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I specialize in pricing and financial strategies for service and technology providers. Contact me to discuss solutions for your organization.