The start of the new year looks a lot like what we saw over 2022: Businesses are struggling to pay their bills.
Late payments are higher than normal and it’s creating a challenge for Accounts Receivable and credit departments everywhere.
Thirty-nine percent of credit managers say the No. 1 reason customers are stretching payments further than the norm is due to inability to pay, according to the National Association of Credit Management (NACM). Credit managers shared their experiences and frustrations on the latest episode of the NACM podcast Extra Credit:
“Some customers’ mentality is they don’t pay until they’ve been paid. … The demand for their products is down, and cash flow is tight. The customers in this sector [coal, energy] are experiencing negative growth in some cases.”
Where you rank on a past-due account’s pecking order is increasingly important. “It’s like the old saying, ‘robbing Peter to pay Paul.’ They’ll pay their top supplier first and so on down the line. If you’re their 3rd most important supplier, then you’re 3rd to get paid. It’s what we’re seeing.”
Following up with customers who are past due sooner than later matters. NACM notes the majority of A/R and credit departments take between five to seven days to follow up with a client who hasn’t paid. The outliers are crews that take action in three days or sooner, and those who are as late as 15 days.
“We’re on the phone within four days, but still we can get stalled. For example, we call a customer and it says, ‘we don’t have the invoice yet. Can you send it?'”
Getting past the ‘check’s in the mail’ excuses
There’s no cure-all for the timeless problem of late pays. One idea is to give customers what they want. When it comes to making regulator B2B purchases, customers say their preference is bank-to-bank payments followed by corporate credit cards.
Yet for more than a third of U.S. companies’ credit departments, checks are still among the most common or the only payment method used. And for a customer that’s trying to stretch payment as far as possible, it can do so most effectively by delaying to send a check.
To prevent “the check is in the mail” tactics, A/R can insist on card or bank-to-bank payments with newer customers or clients who’ve been late to pay in the past. This can involve adapting how a credit team operates, but it may be the only option to keep cash flowing in what’s looking like a very rocky year ahead.