SOI 2012 - Pay Habits: No More Net 60
Clients Are Paying Faster Than Ever Before
It has been common for some distributors to wait 60, 90, even 120 days for clients to pay their bills. And, as distributors faced a sluggish economy a few years ago, they were reluctant to change the tide and force clients' hands on the issue.
Recently, though, client payment habits have changed for the positive. According to Counselor's 2012 State of the Industry Survey, clients are paying their bills much faster than they have in recent years. Distributors report that clients paid their invoices in an average of 33 days last year, a decrease from 35 in 2010 and 38 in 2009. The result? Clients are paying at a 13% faster rate than they were just two years ago.
"They're better prepared to make payments than in the past," says Chris Vernon, president of Top 40 distributor The Vernon Co. (asi/351700). "Our experience of bad debt is the lowest in history." That bad debt was 0.05% in 2010 and 0.07% in 2011. Those are staggeringly low numbers and are credited to the company's diligence on the front end – checking credit reports for payment habits and using technology over the long haul has reaped positive results.
The old-fashioned way of invoicing clients is just that – old-fashioned. The cost and time it takes for mail to arrive reflects a process that's antiquated when it need not be. Consider the work that goes into the paper invoice – inputting information, printing the form, postage costs, time in transit, not to mention the time it takes to enter into the recipient's own system.
With electronic invoicing, the transaction can be completed quickly. "We are pretty much paperless, and the ease and speed of getting the bill is leading to a reason for quicker payment," says Seth Weiner, president of Sonic Enterprises (asi/329865). "We moved to a cloud-based system in October, so almost everything we do is electronic; all but direct marketing." Clients have been happy with the change too.
"In our business, the time involved in an order is so much smaller now," Weiner says. He says that the company can offer a client net 30 terms, produce an order in as little as two days and be paid within two weeks.
Vernon has seen similar results. "The electronic payment trend is definitely here to stay," Vernon says. Not only does the company bill electronically, it also prefers to be billed the same way. "With some of our larger preferred suppliers we've been doing electronic invoicing for quite a long time and it speeds payment to them and we get early pay discounts," Vernon says. "We can pay them quickly and wait for our client to pay us."
Many suppliers offer discounts of up to 5% to distributors who pay their bills early. And often, those distributors are passing those savings onto clients who respond in kind. Not only that, but they're also able to offer clients a discount for paying early.
The old adage is true: People want to do business with people they like. And, that fact can go a long way to having clients who pay early or on time. "I guess if people are paying better, they like what they're buying," Weiner says. "If you do a good job, people are going to pay for what you did."
At times, building and especially maintaining good client relationships takes hard work, but the payout is worth it. Nothing is worse, Vernon says, than a client who takes you out 120 days, and finally pays with a credit card. While you're getting paid, you're also forking over a 2% processing fee to the company handling the transaction. Rather than letting it get to that point and festering, Vernon believes in being proactive and working with a client.
"We benchmark best practices with other distributors, and what we see are some clients asking for split invoicing," Vernon says. Those situations involve larger orders that are spread out over time and include fulfillment and warehousing. The company builds in a financing charge that it shares with the rep. And the strategy has ensured a more timely payment.
The result is closer-knit relationships between suppliers and distributors, as well as between distributors and their clients. And the ultimate benefit that distributors see from a tighter business partnership is that clients are more likely to pay their best vendors on time. "I know the client is looking to run similar operations for its own business," Weiner says. "It makes no sense to have five distributors working on orders at the same time."
As certain factors in their favor collide, distributors say they expect the faster-payment trend to continue. With the economic climate improving, client budgets loosening up, and technology helping to speed the process, distributors believe the future will hold even quicker payment plans from clients – and improved cash flow for their own businesses.
Another factor is the use of credit cards by smaller clients. That will continue to have benefits and pitfalls. "The clients can monitor the spend better, and a lot of times they get points or rebates," Vernon says. But the caveat is the transaction will cost the distributor in processing fees.
Ultimately, though, once a credit card number is received, a faster payment ensues. And, as paying habits continue to improve, the future looks bright for distributors. "I think the trend is upward," says Jill Albers, director of new business development for Shumsky (asi/326300). "We're seeing markets improving and budgets are going back up."