Collecting debtors and yesterday’s newspaper
Having problems collecting money from your debtors? Look at it this way –
You like to read the daily newspaper in the morning, but you are short of cash.
You say to me “Sell me today’s newspaper and I’ll pay you tomorrow”. So I make the “sale” and you become a debtor.
Tomorrow, you want the newspaper again, but you only have enough money to pay me for yesterday’s. Which is more pressing, seeing today’s newsaper or paying for yesterday’s?
You’re too embarrassed to come to me, so you go to another newspaper vendor and ask for today’s paper, telling him that you’ll pay him tomorrow.
He tells you “Sorry, chum, but I don’t sell yesterday’s newspapers. It’s cash before delivery with me”. So you hand over the cash (my cash) and he hands you the newpaper.
Now, which of the newspaper salesmen thinks he’s made a sale? Both of them.
Which of them has actually made a sale? This one?
or this one?
Only the second one.
The moral of the story? You have only made a sale when the money is in the bank. Yesterday’s newspaper has zero value and therefore there is very little incentive to pay for it. Or, putting it into a different context, the goods or services that your firm sells have maximum value to your customer immediately before delivery and therefore that is when he/she has the maximum incentive to pay.
At Harbour and Associates, we put this policy into place after struggling to collect debts for something like 40 years (yes, 40 years!). It was my lovely wife who finally persuaded me that we should be a cash practice. At the time we had over R2m “worth” of debtors. The transition took courage, but we did it and now we adhere strictly to our policy “Put the cash in our bank and we’ll do the job”. Our debtor’s list is a string of zeros.
Rather than upsetting people, it gets across the message that we know we’re far better than the competition and they’d be crazy to buy from anyone else.
Of course, we have to be far better than the competition and so will you if you have the courage to follow our lead. And don’t kid yourself that you can’t do it in your industry. Do you know any other firm of Chartered Accountants who charge cash up front right across the board? You see, we can’t do it in our industry either!