Posted Jan 27, 2016 by Jason Magee
Or Small Business Challenges: Part 1
One of the biggest challenges that any service business has is getting paid. We do the work, send an invoice and hope that a check comes in at some point in the next 30 days. Most times they do (thank you to all of our wonderful fast-paying clients), and sometimes they don’t. Which causes office-wide fantasies of guys named Vinny that will do some ‘persuading’ right after they install this month’s Magento security patch on three client sites. Clients that paid within 30 days.
But this is 2015 in Ann Arbor, and I haven’t met a guy named Vinny since grade school. And I’m pretty sure he runs a mobile dog shampoo and grooming business in upstate New York so he wouldn’t be much help even if he could install Magento patches.
And in 2015, in Ann Arbor, we found ourselves with a big receivables problem. We essentially became the Bank of Human Element. Even though we continually reminded clients (and most did not intend to late pay) in some months we were showing nearly 50% of our invoices were going past due. If it had continued, it could’ve caused real problems in our ability to be a healthy and solid partner with our clients. Not to mention paying for things like team lunches, gummy bears and whistling nerf darts.
So, after discussing the issue with our new accounting team, the Rehmann Robson branch near Briarwood Mall, it was recommended that we incentivize fast payment rather than penalize late payment. Even though it went against my anti-punitive nature, we decided to take their recommendation and roll out 1% 15 – NET 30 payment terms across the board to all our clients. And yes, 1% 15 NET 30, is an actual thing that means something to accountants (it means you get a 1% discount on your bill if you pay within 15 days). Of course, we also added a couple of sticks, like we could keep working, but couldn’t push code live once a client was past due, and at 15 days past due we had to stop work entirely. But the main thing was the 1% discount for payment within 15 days.
After two months, our past-due receivables dropped from 50 percent to under 10 percent and everyone involved is much happier. Especially me. And maybe the Bank of Human Element will be able to shut down – or at least keep better hours.
Jason Magee is one of the Managing Partners at Human Element. Look for Part 2 on Small Business Challenges coming in late February.