Any entrepreneur looking to start and build a new business would typically have a long list of priorities to consider. This might include what legal structure to adopt, how much operational money to raise (and from where), the specific market upon which to focus, how to advertise the business to customers and how to render efficient and effective service, etc. How to get paid, however, rarely makes it to the list, and even if it does, as a very low priority. Even large-scale and mature businesses commonly fall into this trap, leaving the whole subject of getting paid by the customer as an afterthought at best. So, why is this the case and why does it matter?
First and foremost, whether it is a start-up or mature business, cash-flow is the lifeblood of any organisation. Initial cash-flow may come from shareholders or from borrowings, but pretty quickly, almost all the cash that most companies get comes from its customers. Ideally then, customers who are satisfied with the products or services that are provided are happy to pay the bills that are sent to them. However, they will only remain satisfied if the process for sending them appropriate bills and for settling these bills has been well thought-through.
To illustrate how different this can be from one company to another, let’s look at two example organisations of similar size (each issuing about 3000 bills a month on 30 day payment terms) to see the impact of a well-designed and executed billing and payment system, versus one which is poorly designed and executed.
In company A, management have decided to issue bills/invoices to customers electronically as much as possible. They therefore ask for email address contact details when they acquire new customers and even request a mobile phone number so as to use both email and text messaging when appropriate. Furthermore, they automatically upload their bills into a full digital billing and payment site where bills can be seen and settled 24/7 (such as www.payswyft.com). This allows all bills to be quickly uploaded and viewed almost instantaneously as they are issued. The bill is displayed online in icon format (with full bill detail if required) and can be settled on the same web site immediately. Settlement options include all major credit and debit cards, calendarised dynamic debit payments and even cash settlement choices at the site. In summary the customer gets his or her bill immediately as it is issued (within seconds), can pay it within a few clicks online and gets a record of the transaction stored in the system forever. Because there is really no need to print anything to paper (unless people want to), this is an entirely “green” system for all parties.
In company B, management have decided to stick with a traditional billing system and, as such, send physical bills to customer home addresses. It takes 2-3 days to prepare the “bill-run” typically and takes up to 2 -3 days for the bill to reach the customer (with a second class stamp). Once they have received the bill customers can pay by cheque and direct debit, but only by credit or debit card if they call the company’s call-centre between the hours of 9am and 5.30pm each Monday to Friday. Some bills are lost by customers (and need to be found and resent) and in all cases a follow up chase bill is sent out again after 21 days to encourage settlement within the 30 day terms. Customers call in to get copy bills frequently and also regularly call to ask questions about past bills.
In company A, 90% of customers are not only happy to pay online but 95% of these do so on terms or better. Of the other 10%, cheques and cash payments are rendered, but the system of email and SMS alerts keeps days outstanding to within 3 days late over terms on average. The business therefore needs no special late payment reserve and has no call-centre staff to pay. It also has very few people involved in account reconciliation as most of the electronic payments are automatically matched and reconciled online. Customers are generally happy with the flexibility and choice offered in the payment options, and often comment on it as “a big plus” in the annual customer survey. The bottom line-the cost to issue a single bill and get paid costs about £5 total in company A. This is therefore £15,000 per month or £180,000 a year.
In company B, 30% of customers pay by direct debit on terms. The rest either send cheques or phone in to the call-centre to make a card payment. While 60% of these are paid on terms, 40% are paid late and days outstanding run at 10 days over terms on average. The business therefore runs a reasonably large cash reserve (as an overdraft from the bank), has quite a few staff in customer service (to handle the call volume) and in accounts (to deal with reconciliation issues). Complaints about payment problems are frequent and billing is generally a big minus on the annual customer survey. The bottom line-the cost to issue a single bill and get paid costs about £10 total in company B. This is therefore £30,000 per month or £360,000 a year.
It may seem that these two companies of similar size are deliberately and conveniently described as being poles apart in their approach (with naturally large scale differences in their costs). However, these are real example of two companies that put getting paid first versus last. The key (and hopefully obvious) question is which one would you rather be in your organisation?
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