Breaking Down the Reasons Your Customers Aren’t Paying You
Every company has customers who occasionally or routinely pay their invoices late. Other customers pay on time for years until suddenly, they don’t. When a customer’s invoice runs 30, 60, 90 or more days late, the immediate question for accounts receivable is how to get the customer to pay that bill. But there’s another significant question to ask: Why isn’t the customer paying you on time and as agreed? The AR team isn’t the only department that needs to know the answer. In order to get outstanding invoices paid as soon as possible and to salvage worthwhile customer relationships, other departments need to be aware of the situation, too. This includes sales, CX, fulfillment, and others.
Why Aren't Customers Paying On-Time?
On a Tesorio webinar about Connected Finance, Jeff Epstein, the former CFO at Oracle, explained that the reason a customer pays you late or not at all isn’t always as simple as a lack of cash. There’s often more to it, which can help determine the best way to deal with a customer. This additional context also often indicates a need to adjust some internal processes that are inadvertently impacting collections in a negative way.
A sale to a company unable to pay: A financially unstable prospect might have been targeted by a marketing campaign or a sales rep in order to boost sales, indicating a need to tighten up the pre-sale process for determining creditworthiness. Sales can sometimes relax requirements like adjusting the payment period in order to entice the customer to seal the deal.
A previously solvent customer now in financial trouble: At the time a customer comes on board, they may be fully capable of paying their bills. But anything from a bad economy to a reputational hit, a change in market preferences, or an unprecedented pandemic can alter their creditworthiness. Making sure that routine customer check-ins are a part of the relationship management process can help spot a red flag before a customer gets in over their head.
A slow-paying business model: Customers are trying to manage and forecast their cash flow, too. As a result, some make the strategic choice to pay late, in which case you might want to adjust their terms or offer them a bigger discount for paying early.
An unorganized customer: Sometimes late payments are just a consequence of a customer’s inattention to detail, in which case they may need more email or phone call payment reminders.
An incorrect invoice: Customers typically don’t want to pay if their invoice is wrong. If that’s a recurring issue, there’s a glitch in your invoicing process that needs to be fixed.
Barrier to payment: Reviewing your payment process itself can go a long way to make sure the process is smooth and efficient for your customers. Do you offer automatic payments so the customers don’t have to think about it? Do you accept all types of cards or other payment types? A confusing or clunky payment process will create stumbling blocks for your customer and certainly slow the process down.
Security Concerns: Security concerns go both ways, for the customer and for your business. Like the previous point, you will need to review the payment process from an outside eye to ensure the process looks professional and secure. Customers can get scared of a checkout screen or process that seems to be unsecure and could put them at risk in many ways. Make sure that the process looks like their information will not be compromised and review your own storage of their information so that it complies with PCI standards. In doing so, you will reassure your customers of your interest in protecting their information too.
Likewise, it can be beneficial to protect yourself as well, not only from companies that are unstable financially, but scammers and legitimate criminally-minded individuals too. On top of reviewing your company’s presale processes, make sure that you only collect authorized payments to prevent things like chargebacks. A chargeback, in simple terms, is where the customer cancels the payment through the bank. The bank will reverse the charge for many reasons including unauthorized payments, and charge you, the business, a fee. Chargebacks can seriously impact your accounts receivable balance sheet because your expected cash flow is reduced. You can fight the chargeback to get the money back if you can prove the charge was legitimate, but you still will owe the fee. Review chargeback prevention steps and other security payment options like 3D Secure to prevent chargebacks in the first place. That will ensure your money once finally is collected, actually stays with you, and reduce the fees and headache process involved with fighting with the bank for your money.
An unsatisfied customer: Product problems or defects can zap customers’ motivation to pay. If this is a frequent reason for late or forsaken payments, you likely need to review your manufacturing, packing, or shipping processes.
Departing customer: If not renewing their contract, customers might stop paying. So, it pays to make sure your collections team gets a heads up about uncertain contract renewals.
10 ways to get customers to pay on-time
So you reviewed the possible reasons why customers might not pay on time, but what steps can you take to get your customers to pay faster? American Express recommends the following intervention:
1. Invoice promptly to help increase your cash flow.
2. Avoid outstanding invoice disputes with estimates.
3. Leave nothing to doubt.
4. Create clear and consistent payment terms.
5. Get creative with payment terms and your billing schedule.
6. Offer multiple payment options.
7. Follow a consistent nonpayment process for follow-up.
8. Leverage your products and services when necessary.
9. Know when to hire a debt collection agency.
10. Manage your client relationship.
Accuracy and Connectivity Improves Collections
You are in luck! If your finance department seems to already be drowning in spreadsheets before they can tackle any of the recommended steps above, then digital finance tools like Tesorio’s AR Essentials can be the solution! Tesorio can improve the accuracy of your invoices, automate your invoicing and dunning processes, and increase important AR data visibility across your company. Get your Tesorio demo today.