Q: I like selling, but I hate collecting. And I must be doing something wrong, because I always seem to have more month left at the end of the money. Can you talk about collections? — Cashless in California A: Being a mobile tool distributor may look like a sales business, but it’s...
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When you let too many customers do this you’ll end up with cash flow problems.
Losing Your Footing
A related collections problem is what Boyhan refers to as “time payment erosion.”
You need to re-negotiate the contract every time you sell a customer with a balance more tools.
Say a customer with a $25 weekly payment and three weeks left buys a new $100 screwdriver set. He can’t just go on paying $25 or he’s stretching your turn to eight weeks. You need to work to get him to $200 outstanding over, say five weeks, so now he owes $40 a week – or more if he offers to pay more.
If you don’t re-negotiate you could end up with a cash flow crisis. Over time, a five-week turn can become a 10-week turn and you will find it hard to meet your tool payments.
Cornwell preaches a five-week turn, says Boyhan. That means, if you sell a tool today, you should negotiate to collect all of your money back on that tool by week five.
The best dealers get their first payment the first day they sell a tool. You’re basically saying to your customer: “You’ve got the tool today, you make your first payment today.”
This makes the best use of your money, says Boyhan. In fact, if you can make this work, you can sell tools by rarely putting any of your own money out there.
Here’s how: Say you sell a $100 wrench with a 40-percent margin. If you collect day-one on a five-day turn, you get $20 a week for five weeks.
At the end of the third week, your customer has paid the $60 you owe your supplier. If you have 15-day terms, your customer has financed the purchase with no cash out of your pocket and you can pay your supplier. Then, the next two weeks you just collect your profit.
As you can see, if you watch your step and don’t get tripped up, collections isn’t as hard as it seems. It’s all about setting rules up front and holding your customers to those rules.
Next time, I’ll talk more about collections, especially how to get a customer back on track who has fallen seriously behind and what to do once you’ve given up hope.