Tim pulled up the client’s spread sheet on the video share screen. Joe,* our client, moaned as he focused on the list of past due clients. His eyes scrolled, exhausted, past the list of over 90 days. This was going to be a long collections conversation.
It didn’t have to be this way.
Joe is pretty good at what he does; for over 35 years he has been completing projects for his active and loyal customers. But here’s where it gets strange: like so many contractors after the Great Recession, Joe got in the habit of just taking whatever customers would give him. Instead of fighting for his piece of the pie, he begged. It happens to everyone eventually. Joe lost his edge and was never able to recover.
While he still completed his projects well, Joe was tired and forgot that collecting was part of the project. He was so focused on the volume in the next project, he forgot to follow up with his clients. He was so wrapped up in keeping his crew busy he didn’t stop to concentrate on payments.
But Joe is no dummy. He made the calls and barked at his staff when collections were slow. But in his haste to keep the project pipeline going, project follow-up kept on sliding. In addition, he missed a tremendous opportunity to meet with his clients and make sure the project went the way it was supposed to. The nuggets of knowledge he would have gained in those meetings could have changed his business, but for some reason, he could not bring himself to engage with clients.
Then the economy improved. The work grew, but there was this nagging issue of cash flow. So Joe did what any successful entrepreneur would do: he sold more work. Anyone who knows the small business world will tell you to take the sale; consistent volume is hard to come by. But the growth didn’t help cash flow, so he reached out for a line of credit. That helped a little but soon, many of his clients weren’t paying him for upwards of 200 days.
Joe decides to double down and goes for the big volume project. He knows the GC and trusts he will take care of him. Two YEARS later, the project is wrapped up but Joe still hasn’t been paid. Countless conversations get Joe nowhere and he’s on the hook for a lot of money. Loan fees have dried him up and Joe, the good guy that he is, stopped taking a salary. He’s drowning fast.
It’s week three for Newpoint and we’re talking collections. Joe is exasperated as we go down the list as he repeats, “they are going to pay,” “they said they would pay,” and “I don’t know the status.” 1/3 of his clients are over 200 days past due. There’s even one that’s over 800 days, yet Joe continues to insist, “he is good for it…” When we share his cash cycle with him, he’s stunned to see how far he really is stretched with all his projects.
As we dig into the story behind each collection, we find that Joe has very little insight into each situation. Simply asking Joe for a date on when he will get paid becomes a hide and seek game which then evolves into a confession: “I don’t really know.” So we relearned the art of asking. Since it had been some time since Joe had asked his clients about payment, his pitch was a little rusty. To his amazement, not only had the rules changed but the contacts had, too. Joe was really not doing well. And unfortunately, in his “fire and forget” approach, Joe had also forgotten to follow up on the paper work, too. When he could find his customer, he would find out that he had not completed the proper paper work, that he had to resubmit this, find a copy of that, or in some instances go back to the project and fix something.
But what was Joe really missing? Was it the paper work? Not really; that was just a symptom.
Meet Sun Tzu
Sun Tzu, an ancient Chinese warrior, weighed in on the matter. His greatest line is, the battle is already won before it begins. In this case, it means that successful collections have almost nothing to do with collections. Poor Joe is running himself ragged trying to get more sales but what we find is that he had not properly prepared himself for the battle. Joe got it in his head that sales equal wins. While sales help, you’re not a true entrepreneurial warrior until you have collected the spoils of war – cash from the sale.
We did help Joe collect an awful lot of money over the next several weeks, but it wasn’t the big win he hoped for. The warrior technique he has learned is preparation. He needs to be organized before the invoice goes out. His invoice needed to be backed up with details about his time, labor, and site check offs. And for this he needed standards.
Standards are the things that prevent exceptions like, “I forgot,” “I did not know,” “this project was different,” and “I was too busy to get to it.” The list goes on but the point is that projects have beginnings, milestones, and ends. Each has to culminate in a set of check offs and reports. Define the standards, communicate them, and hit them. Check that you hit them. When you’re done, you’re prepared to invoice with your documentation in order. It is so in order that you feel good about it and you lead with it. You’re proud of how tightly you have completed the project and you know where you had issues. This proud preparation motivates you to sit with your client and talk about what you know and what you have learned, and allows you to lead with a collections effort.
Good documentation moves faster through the system and helps your client get through their accounts payable process more quickly. This allows you to win the collections battle. On the other hand, bad preparation is a losing battle. When you don’t document well, you’ll have to go back later and do it again to get it right which is always more expensive. Collections is not a phone call game of cat and mouse. It’s a shorter battle and one that allows you to avoid slow, anemic, payroll-threatening cash flow. These rules apply to all industries.
Where are they now?
Joe is working on his standards, Sun Tzu is still right, and the next cash flow battle is yours to win. Be an entrepreneurial warrior: prepare to be your best by carefully documenting sales in preparation for your collections.
*Names have been changed to protect the innocent.