guest commentary by David Potts
Editor’s note: David Potts is a certified public accountant with more than 25 years experience. Although every effort is made to provide you accurate and timely tax information, it is general in nature and not specific to your facts and circumstances. Consult a qualified tax professional to discuss your particular case. Feel free to e-mail topic suggestions or questions to firstname.lastname@example.org
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Past due accounts receivable has to be one of the most aggravating problems a business owner must confront. As a business owner, you perform the work, incur significant costs, and deliver your product or service to a customer, trusting this person will keep his word and pay you for the work performed. Unfortunately, in business, you soon find some people aren’t trustworthy.
With that said, keep in mind most people are trustworthy. If that wasn’t true, all business would be cash business and all businesses would operate much like the way I imagine the illicit drug trade operates.
People pay bills late. That is just life. But people buying on credit need to think about how a creditor thinks about them if they pay their bills late. If you are a business owner, you work both sides of the fence. Have you considered how your vendors think about you?
As a CPA, I’ve worked with business owners for more than 30 years and I know how most think.
When a business owner reviews their accounts receivable, they generally don’t pay much attention to specific accounts unless they are 45 days past due. When an account becomes 45 days past due, they start to take notice. As they review the specific customers in the past due column, they also tend to categorize how they think about each past due customer. The process goes something like this.
The first category of customer is those which are past-due unintentionally. This customer has gone to the mailbox and picked up their invoice, they were distracted before they handed the invoice to their bookkeeper, and it didn’t get into their accounts payable system on time to be paid by the due date. A gentle reminder is all that is required to get paid. No foul.
The second category of clients is a client who is constantly past-due. These customers are in circumstances that are usually temporary and not of their own making. They called the billing office, gave a credible reason for why they are past-due, and make partial payments each month, showing some penance for paying late. The business restricts future credit sales, but continues to service the customer. Again, no foul. A customer in this category is still loved, just held accountable.
Next, we are starting to move into a category where business owners feel less charitable about a customer. This is a category where creditors begin to categorize customers using labels such as “liar” and “thief.”
This customer is the person who lives better than the business owner, using the money they owe him to make their new Lexus car payment or pay for the family ski trip while your creditor drives his truck home and worries all night about cash flow and paying his own bills.
For small business owners who extend credit, a customer in this category might cause the owner to dip into his savings, or borrow from the bank, or ask his own vendors to be tolerant until this customer pays their bills. Because of this customer’s behavior, he would really love to fire them as a customer, but he delays firing them because he fears that would result in a significant bad debt.
It is somewhat ironic in that a person will use a vendor’s money to live high because they are afraid they won’t look successful to their peers and friends. In reality, how their vendors think about them as a person has been changed for years to come, probably forever. And not in a good way.
In order to look like a success to their friends and peers, they ruin their image and eliminate their trust with their vendors, who can greatly affect their success.
Of course there is that final and ultimate category of customer, the thief; a person who received a valuable service, of high quality, without defect, and has no intention of paying their debts. May they burn in hell.
Paying bills timely is important to the business extending credit and to the person responsible to paying the bill. Sometimes people forget this fact.
If you are a business operating on a thin budget, you may frequently have difficulty paying your bills in a timely manner. If you’re working hard and trying to do what’s right, there is no shame in encountering these difficulties. However, your vendors will judge you by the timeliness of your payments. If you cannot pay somebody on time, pick up the phone or go visit them and let them know your situation, that you intend to pay all your bills, and that you will be soon be a loyal customer who pays their bills timely. You will gain their respect.
Personally, it is when a client with a severely past due invoice chooses to ignore and avoid me that I get offended.
Business runs on trust. I am thankful and grateful that 99.9% of my clients are trustworthy and honorable people. But that other 0.1% sure are frustrating.