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Late payers affecting cashflow3/30/16
Over the past couple of years we have moved over to builders work.
It makes up about 50-70% of our work now and am experiencing all the classic problems with builders slow payments.
The general practice seems to be. Pay me a deposit because they are behind schedule and want me to push the job out quickly, drag out a progress payment that I am too busy run off my feet finishing the job to chase it up and then when the job is all said and done and the final invoice is in go missing for a while, don't answer the phone ect. until the next job is ready and they are behind schedule then they pay up everything and the cycle starts again. Because our relationship with these builders is in infancy and we are a smaller operation I have always felt I owe em, if we are a bit late with a job (usually because of a flow on effect from there schedule or an unrealistic lead time) I hesitate to invoice quickly in fear of rocking the boat. Now that we have proven ourselves and we have good service, high customer satisfaction rate and all deadlines met I is time to strengthen my stance.
I'm over it, my cashflow is like a yoyo and I can see that the pattern is exposing my company to risk. I need to build up working capital for expansion but I'm forever waiting for overdue payments.
From the start of this year I have set up a payment schedule as follows.
All invoices are 7 days from issue, I have accounting software set up to automatically send a reminder of overdue bill at 3,7 & 14 days and I make a call around the 7-10 day mark.
I am happy for builders to negotiate with me on extended days BEFORE COMMENCEMENT but I wan't to create a system to reduce our late payment days.
This is what I have come up with.....
-For every 3 days an invoice is late paid you lose a day off your next invoices due date. example if you are issued a 7 day invoice and you pay it in 13 your next invoice is 5 days.
The second option I am considering is to offer a discount for on time payments, instead of reprimanding for bad behaviour I am rewarding good behaviour. Maybe even discount for higher percent payments in each stage. Not sure what amount to offer as discount. I guess some research into the cost of overdue payments on bottom line could help with this.
I'm banking on our responsive service, reasonable pricing and quality product to keep them coming back.
I'm happy to go hardline approach with private clients because they are generally one off and tend to work to a payment system without issue. At the end of the day the builder likes to "be the boss" and puff his chest out and call the shots, happy for him to parade around like a peacock all day, I,ll tell him how good he is but also need to get paid on time.
I've let a few builders go because they were terrible payers, Generally if they are bad with the books, they are bad with scheduling which in turn eats into our profit margin, burning the candle at both ends. Therefore figuring if they aren't happy to conform to a system like this they are bad news.
Sorry for the long post. Interested in seeing if anyone has done something similar or what approach they take to late payments.
Many, many years ago, I worked as a purchasing agent for a manufacturing company. Most of my job was procuring raw materials for the end product. A number of my vendors would complain about late payments from our Account Payable department. Try as I might, there was nothing that I could do to persuade the AP folks to pay on time.
However, there was one vendor that was ALWAYS paid on time. Their secret? They offered a 2% discount if they were paid in 10 days. I'm pretty certain that their cost was built into the price of the product that they sold us. The bean counters got to claim that they "saved" our company some money by taking advantage of the discount offered by this vendor. The vendor got paid on time, and was very happy. The other vendors? Well, they waited.
Something to keep in mind: the KISS Principle. Keep It Simple Somehow. Your first approach of punishing the contractor is waaaaay too complex and will probably lead to needless arguments about how many days should be added or subtracted. The amount of your time needed just to administer that system will definitely eat into your profits and cause you grief.
The second system that you proposed still has some extra complexities. Offering extra discounts for higher percentage payments is another excessive bookkeeping task. KISS!
Send invoices per the contract. Give a set discount (the same % for every invoice) if paid within X days. Collect the checks.
And, forget negotiating "special deals" that vary from job to job. Unless there is something extremely different about a particular job, keep your rules consistent.
Been there, done that. Finally a topic I know my way around.
I'm with Jim. 50%down, 40% on delivery, 10% when complete. You can vary this last amount down to 5% if you want. Once I decided that I wasn't a banker, my cash flow became much better. This is your business, not the builders. If they don't like the terms, go find another one who wants service and quality. Remember, the builder only gets to pick 2 out of 3: Price, Quality or Time
You are not going to do business with builders without giving credit.
Always file prelims on them.
Do a credit check on them before you sign a contract. I.E. ask other subs (preferably ones who are towards the end of the job, e.g. painters, carpet.) how they pay.
I disagree that you won't do business with builders without extending credit.
Thankyou. Much great advice.
Maybe it's different in different locations but I tend to agree with Pat, It is very hard to get a relationship off the ground with these builders if I don't offer credit. That's why I negotiate per builder, the fresh startups will pay the upfront 50% but the old school guys with the good jobs won't do it.
Jim and Tom. Was there a point in time that you just stopped the mucking around and insisted on your payment terms? What happened with your builders? Did some leave?
These builders are good and the type of work is allowing us to grow and increase turnover and profit so hesitant to go hardline and lose the momentum.
Has anyone ever gone tools down or stopped supply if a bill wasn't paid and what was the effect on the relationship and the cashflow?
Are you selling financing or quality, turnaround, and service?
I think your "punishment" section is too complicated and will be ignored. I prefer the incentive plan as well. It would never enter my mind to take the discount and pay late. I don't do business like that!
What tomB sais. State on your proposals that late payments after 30 days incur interest of "X" (usually 5-10%) or 60-120% annually.
We solved that problem two ways.
2. Payment terms are 50% Down 40% at or before delivery, balance on completion with all change orders due immediately.
We tried the 2% fast pay discount a long time ago. Most took the discount regardless of when they paid.
I knew one guy that did kitchen for designers an G.C. and what he did was 50,30,15,5. He always had the boxes ready before the doors an drawers so he would go an install the boxes,kicks an trim an have 80% of his money an then 15 on the doors an drawers. The last 20% was always the hardest to get so after he put the boxes in the countertops would be install before he would put the doors on so if they wanted to be slow with that 15% they would have to deal with the housewife saying to the designer or G.C when it going to be done. If the owners would call him he would just say I'm just waiting for your designer or GC to pay the 15% and I on my way over. This guy always got paid . Lol.
Well, so much for my 2% Net 10 idea. :-(
It isn't going to work if the builders don't play by the rules. You only get the discount if you pay in 10 days. What worked in our manufacturing scenario years ago obviously isn't going to work here.
When our business was doing more custom projects, we had a 50-40-10 rule. 50% deposit before the project started. 40% check before the product was even loaded at our facility for delivery. 10% after "substantial completion" of the project. Little items like a knob or something else did not hold up the 10%. Of course we worked to prevent any minor items to prevent return trips to the jobsite. Those trips cost us money/profit.
We no longer deal with these type of projects on a routine basis, but, when we do, we pull out the 50-40-10 rule.
Thanks again for great advice. The more I read the more I feel the custom aspect warrants the 50/40/10 rule. We get lumped in with all the other trades pricing program but many of those trades (electrician, plumber ect) aren't building and supplying a custom item that would be near worthless if it wasn't purchased for that particular house. Cabinet makers and joiners need to be treated differently. + our machinery outlays ect ect.
Also the "practical completion" is a great way to get your last payment with a small outstanding item. I'll be writing that into the terms and conditions.
The thing I don't understand about the early payment discount is this.
If I give someone a price for $100 dollars with a 7 day invoice and write on the invoice "pay $99 if you pay within 2 days", is the invoice amount not clearly $100?
I can't believe someone would have no shame in paying the lesser amount AND late.......although these guys never cease to amaze.
P.s Jim you were spot on about my slowest payer needing everything the quickest. Always telling me the job was ready months before we can actually start on it, throwing my scheduling out then working overtime to get it done, being late to deliver and getting a hard time for it. I think he'll be the first one to get kicked off the gravy train.
You don't have to give them all the boot at once.
Custom Cabinets-NO Money Down!
0%- Pay When YOU Want!
The point came when I was sick of worrying if I was going to make payroll, loan payments, etc... I worked the billing/invoicing before everything else. You want me to build your stuff? Send a check for 50% down. I also let all my builders know when they call when they can expect to get on the schedule (at least 4-6 weeks.) Then they start whining about needing it sooner, that's fine but: You now get to write another check for 10% quick turn around on top of the bid price. And I collect that right up front.
As others have said, your worst paying builder is the one causing most of your scheduling problems. Roll out these terms to them first. In writing. Follow them to a T. Don't accept an excuse. No $ = no cabinets.
Are you guys talking about commercial or residential?
I'm skeptical that you can do that with commercial.
Not to beat a dead horse but the terms are the terms.
I agree Pat , that will not work in commercial but one thing I have found that as Tom said the worst G.C is the one that needs it right away. If they can't plan out a schedule how do you think they do running their business.I had one guy come to us on a Monday and said I need it by Thursday. I asked him how long have you known that you needed this cabinetry and mill work and he said 6 months.Plus I love those guy like that that say oh it's not a hard job only a couple cabinets here and there, service desk with a little curve to it ,etc. These are the guys we have learned to stay away from.
One thing I have learned the hard way is that you need to interview the sup(not the contractor), and weigh him to determine the risk of dealing with him.
Reading of the stresses some of you experience with collecting reminds me of many sleepless nights in my early years.
I bust my a** for my customers! I always have. I refuse to succumb to the games some play. I need my money to operate and provide the best quality and service possible.
Because I have worked my way up through the ranks and have a great reputation, thank th Lord, I am finally a position to work on my own terms.
My terms are simple and they are non negotiable.
Thank you for your business.! Everyone is happy. And, if there is a problem after or during the installation, we jump right on it!!! And, the word has gotten around which is great for me.
I can remember back in the day, when we had a problem, It was not that we did not want to fix it, or go back, Its that we did not have any money to go back because we haven't been paid.
Good luck whatever you do friend
First off, we require all first time orders to be COD. Depending on the job type, a deposit may be required as well.
Most contractors stay on a 50% deposit, 50% on delivery term (we don't do installation).
Terms are only granted after checking references, including their bank if possible, and a good existing relationship. We have one contractor that I would never even consider giving terms, because he constantly has scheduling issues, delayed deposits, and delayed deliveries due to lack of funds to pay COD. In fact our last delivery was delayed about a week, and then his check bounced! If I believe him (and I do) it turns out it was because he had an auto pay that came in. The fact that he didn't know it was coming is just indicative of how unorganized he is and why I would not grant him terms.
If you are doing 50/40/10 (a concept I wholly agree with for most of the types or businesses posting on here), then offering a 2% discount is probably not relevant, as it's just 2% of the 10% and not much of an incentive.
At one point we had a vendor that offered 20% - 30 days, Net 31. Obviously their prices reflected that. And while you HAVE to account for it in that extreme case, any discount offered has to be realistically analyzed - what is the benefit to you? What is the cost? Is it worth it? For instance, since we take credit cards, and generally are requiring a 50% deposit, we offer a 1% discount if they choose to pay in full by check. It costs us 2.0-2.3% to take credit cards, but I won't offer 2%, because quite a few people would pay by check anyways.
After many years of struggling to collect, I have found that the biggest help is consistency and records. Once a customer finds out that you are going to call them every time they are 15 days over, and follow up on whatever they tell you, they tend to try and avoid that by paying on time. I review accounts and make calls every Tuesday (we tend to get most checks on Monday).
We have two sides to our business, and on one of those we tend to get many small orders (typically under $500), and have found that accepting credit cards virtually eliminates a collection problem, since most of those customers take that option.
On the other side, we have a few larger customers that tend to have trouble paying because they just don't like taking the time to do paperwork. However, they have the money, and have agreed to let us take the money out of their account via ACH.