Tough times in the Ag market can lead to higher A/R and more write offs
Times are tough. I should actually say times are tougher, as we tend to feel like times are always tough. As margins narrow and producers & Ag retailers operate extremely close to or below break-even, paying their bills gets tougher. Most of us in the Ag sector sell on unsecured credit. By that, I mean we sell on terms and don’t take a lien on any real property. At best, we may get a scribbled signature on the bottom of a delivery ticket that our product was unloaded at the farm that day. In addition, most of us aren’t in the business of enforcing liens, filing legal documents and hauling customers into court. We do those things but they take time, money and typically don’t build business. We operate in a tenuous position of selling a product or service and expecting payment in 10, 30 or 60 days after the fact. Often backed up by our customer’s word and a handshake.
Keep in mind – A sale without getting paid is a charity. A business without revenue is a hobby. So, we have to collect on our sales.
I use the word Pros in the title of this article because if you ever had to go out and collect on an account, you know it takes professional selling skills to get the job done. These are some of the toughest conversations I have had on farm calls or in Ag retailer locations. It’s sensitive and it can be volatile. It can be a downturn in your relationship with this customer or worse yet can bring the relationship to an end. However, it doesn’t have to. It might even be a turning point where you get more involved in their business and help them get better. Here’s some tips on what to do and what not to do
Step 1: Get Prepared: Nothing worse than starting the A/R conversation and find out that your information is inaccurate. Ag business is often a high volume with a high number of transactions. It also can involve some accounting systems that aren’t always the easiest to follow and keep track of. It knocks your confidence and disrupts the rhythm of the conversation when you discover halfway through the conversation, that your info is inaccurate or worse, you can’t explain how you arrived at your numbers. So, get the facts straight. Make sure you have the latest information. I remember once getting the past due report sent from the office which was sent Monday after the checks were entered. I took that information and ran with it all week. By Thursday, my info was out dated and conversations about past due bills were tougher when the customer had already made payment and my report was inaccurate.
Step 2: Get Confident: The bottom line is that they accepted your products and services in good faith, they had no problems with the quality that you know of and they owe you money. As mentioned above, it is a business and without getting paid, it’s charity. So, feel confident that the last phase of this sale is getting paid and then reordering. Get help in understanding the transaction history. Better yet, if it’s really complicated, bring someone from your accounting department with you to help explain it.
Step 3: Get the possible end goals in mind – before going onto the farm: Try to imagine several of the outcomes that might happen. Worse case, best case and alternative solutions. They might get volatile and deny the past due or worse, they rant/rave/yell/walk out on you/get abusive verbally or physically. I remember calling a sales person to tell him to go collect on a past due amount. The salesman informed me that he would not be going out there anymore. When I asked why, he informed me the last time he went to collect on it, the customer pulled a gun on him. I accepted that and we wrote it off as I certainly wasn’t going out to collect $600 on someone who was willing to pull a gun out. Best case, it gets paid. Alternative solutions – at some point in the conversation, it often turns into a discussion on what the customer is able to do to clear the past due amount. It might be paid in installments over the course of time. To agree to this, you will want to brainstorm with your supervisor or accounting department as to what you are capable of doing.
Step 4: Get the customer’s side of the story first – (seek to understand): This is an absolute must for this situation. Don’t jump into this conversation with a lot of heavy handed paperwork and lectures on paying their past due. I like to section the conversation off. By that, I mean I like to make a comment that we need to have a conversation around the past due balance. That way, we can have the conversation focus on that issue, then we can resume other conversations. Once stated that we are going to talk about credit, then get the customer to talk about where they are at on paying the balance. Don’t save this for the very last thing to talk about. First, it will leave a lasting impression as the last item they discussed with you. Second, it looks like you had ulterior motives or you lacked the confidence to have the difficult conversation. Try to sandwich in between the discussion. I tend to have it early to leave more time to recover if it gets a little heated.
Step 5: Develop a repayment plan – The end result of the conversation is to come away with payment or a solid repayment plan that makes sense for both of the companies involved. Consider what makes sense to the total amount, the interest rate, the amount of credit needed during this plan, what revenue the customer will receive and when. The key is to make the plan so that it is realistic for both parties. However, the most important part is that everyone sticks to the plan. Deviation from the plan needs to be discussed immediately to determine why.
Best Practices:
Watch for changes in payment terms: If they normally are paying in 30 days or 60 days and slip to 90, that is a red flag and you need to start paying attention.
Payment terms in order of preference: Pre-payment, ACH, short dated terms, secured credit, long term credit, long dated terms. The terms need to make sense for both businesses involved. For your customer, time it out with their revenue stream. If a dairy, they may get paid twice a month. So, short terms would work. With an Ag retailer that turns your product quickly, you might offer an incentive for ACH, which times out with fast turning product. If it’s seed sales and the producer won’t see revenue until selling the crop off that seed, then longer terms are needed.
Special case: Large account with high transactions and slim margins – Not your everyday situation but if you have one of these, it is recommended that you take 60-90 days of the revenue from this account and put it into a bad debt reserve. These are the extremely large accounts that we have in all areas of Ag. They are great to have, but generally require a lower margin due to their volume and bargaining power. While great to have and great to have their testimonial, special attention to handling their credit is important. I’ve seen where one of these brought down a company that got in too deep. Put some of that margin away for a rainy day.
Don’t Ignore it: Bad move and your supervisor or accounting department probably won’t allow it anyway. Get on it early and often. If it’s bad, it won’t get better over time. If it’s not bad, then it will get resolved easily. Help keep your customers stay out of trouble.
Don’t Continue to deliver without a discussion: Same as the previous comments on ignoring it. You will be tempted to keep shipping in hope and fear. Hoping they will pay and fearful that if you don’t ship, they will quit you.
Don’t move past due balances to a note to free up more room on their open account: This was a strategy used many years ago that proved to be a terrible idea. Some of the sales team would take the customers that ran up their “open account” (which charged 18% interest) and move that balance to a finance note that only charged 9%. This then freed up their “open account” to continue ordering from us. You can guess what happened to the open account. Yep, it went past due again and now we faced doing another note or pushing for payment before delivering more product. Don’t help them dig a deeper hole.
In summary, collecting A/R is part of the sales process and ultimately lands on the sales person’s shoulders. We might have a collections department or we have a sales coordinator that is great at getting a check from the customer. That’s great, but as sales people, we got our company into this deal and we need to take responsibility for following all the way through to payment and hopefully reordering.
To Schedule a Free initial coaching session today, contact me directly at Greg@GregMartinelli.net
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