Thursday, April 24, 2008
Getting Paid Means Getting Tough
April 21, 2008
Contractors Must Get Aggressive About Demanding Payment
Customers can have some of the lamest excuses for not paying their HVAC contractors. Homeowners suddenly realize that their spouse took the checkbook, and there’s no way to pay after a service call. Business owners claim they’ve never received an invoice, so they need another copy before they’ll write a check. And guess what? They just finished their check-writing cycle, so it will be at least another week before the bill can be paid.
Contractors face these — and probably even more outlandish — excuses every day. Collecting money is almost always an awkward situation, particularly when dealing with a customer who doesn’t want to pay. It’s a fine line that contractors walk: Collect the money owed, so the doors to the business can stay open, but don’t be so assertive in demanding payment that customers no longer want to deal with your company.
Someone once said, “Money is the opposite of the weather — nobody talks about it, but everybody does something about it.” In a softening economy, contractors need to not only talk about it often with their technicians and customers, they may need to be even more aggressive about demanding payment.
“We feel very fortunate, but we do live in Michigan, and companies are folding up or moving out of state every month. Just last week a tool and die company that’s been a great customer of ours called up and said they’re closing down, and they wanted to cancel their preventive maintenance contract. It’s difficult out there. This last year, we’ve been stung for more money than ever from companies closing down and moving out of the state.”
Hurst Mechanical provides HVACR and plumbing services to the commercial-industrial market, and they routinely invoice their customers after service has been provided. Borst states that his accounting department is “very stern” with customers and that any account that hasn’t been paid by 30 days will receive phone calls on a weekly or biweekly basis.
It is almost impossible to collect outstanding bills from those companies that close down or move out of state. “That money just comes right off the bottom line. It’s not collectible,” noted Borst. “We might get 25 cents on the dollar, but even that is wishful thinking.”
No company should ever be happy with its number of accounts receivable, and Hurst Mechanical is no different. The company is constantly looking at ways to reduce “the stack” of outstanding accounts, and the accounting department spends a great deal of time and energy calling customers and asking for payment. The common excuse from companies that don’t pay is they’ve never received the invoice, so someone from Hurst will immediately fax over the bill. If the customer still doesn’t pay, Hurst will refuse to provide further service until a check is received. The company typically demands payment in full and is not keen on accepting partial payment over a period of time.
Borst noted that the softening economy has resulted in an increased number of customers who are disputing their bills as a way to put off paying.
“Every day I’m getting more invoices on my desk that people are contesting. They’ll say our technician wasn’t really there for four hours — but we have GPS to prove otherwise — or they want to know why there’s a trip charge of $46.50 per invoice. It’s a stall tactic because we play phone tag for a little bit, and then the next thing you know, it’s two weeks down the road. It’s all a game.”
To ensure new customers are able to pay their bills, Hurst recently started asking for credit references before service is even provided. As Borst added, “We have to be stern, and we have to get our money. My advice to other contractors is to stay strong and get what you’re owed.”
ASKING UP FRONT
“Even when customers know they’re supposed to pay, we still don’t always get the money,” said Getzschman. “Spouses usually use each other as excuses — someone else always has the checkbook. Or they just disappear. We actually have customers who say they have to leave while the tech is still in the middle of something. Then we get done, and they’re not there to pay.”
In those cases, an invoice is sent to the customer and payment is expected within 30 days. If payment isn’t received within 45 days, the accounting department starts calling the customer, and after 60 days, the account is turned over to a collections agency. Getzschman doesn’t use small claims court to settle debts because winning a judgment doesn’t mean that money will be collected on the account.”
“And it costs money to go to small claims court, and I want to keep our legal fees down. You have to weigh the costs involved. If we had an outstanding bill for $10,000, then we might consider getting an attorney involved, but typically, we don’t have anything that large,” said Getzschman.
Collecting money is an ongoing topic at Getzschman’s, and it’s discussed every Tuesday morning at the managers’ meeting and every Wednesday morning during the service meetings.
Technicians know they are to collect payment at the end of the service call, but they have expressed frustration with customers who simply refuse to pay. Some technicians even go to the extreme of telling customers that they’ll remove the parts that were installed if they don’t pay up.
One of Getzschman’s main frustrations is that customers don’t seem to have any trouble paying the TV repairman or the washer and dryer repairman. “Why is it always the heating and air conditioning contractors who don’t get paid? Every other in-house service company comes out and gets paid.”
That being said, the softening economy may result in even more customers who don’t want to pay. “We, as contractors, will have to be more aware of our accounts receivable, and we’re going to have to stay more on top of it. We’re going to see more delinquencies as we go forward, and the techs are going to have to know that we are definitely a cash-on-completion business. We have to be paid at the end of the job. That’s the easiest way to handle it.”
ANOTHER WAY TO COLLECT
“Contractors arrive at the office in the morning, and their main objective is to determine if their crews have shown up, their schedules are made, and the equipment that’s required for those services is available,” said Ramon Fouse, senior account executive, Greenflag Profit Recovery Systems — TransWorld Systems, Dallas. “They’re constantly getting calls from technicians or needing to be involved with vendors, and when they’re not doing that, they’re focused on acquiring new customers. They sometimes don’t find time each week or month to look at cash flow.”
Fouse specializes in collecting outstanding debts for HVAC contractors across the country, but he is quick to point out that his company is not a typical collections agency. “We assist our clients in collecting their seriously delinquent and past-due accounts for a fixed fee, which averages about $10 per account. We do not phone our clients’ debtors, nor do we intimidate or harass them. We use a diplomatic demand approach, which on average, has recovered about 56 percent of all balances assigned, which is four times the industry average of 14.1 percent,” he said.
That diplomatic demand approach involves sending a written demand to customers after 45 days, or whatever timeframe is decided on by the contractor. The letter states that the contractor has requested TransWorld to contact the debtor on their behalf regarding the referenced account, and it includes a statement saying what the account is and the amount due.
The letter stresses that lack of payment “may be an oversight, and not a willful disregard of an apparent obligation.” A voucher is included with the letter, as well as a window envelope to return payment, which goes directly to the contractor. For those debtors who fail to positively respond, a second demand letter is sent 14 days later, then a third, then a fourth. Fouse noted that the first letter is the most effective in getting customers to pay their bills, while the fourth letter is second-most effective.
“The reason for this is the fourth letter arrives on Day 56, and the demand letter will simply state that the 30 day dispute period has ended, the debt is considered valid under federal law, and they need to make the payment immediately. If they don’t, we send a fifth demand, and after that, my company recommends that the account be turned over to a traditional hard-core collections agency, because half a loaf is better than no loaf at all. And that’s not a customer with whom you want to do business with again anyhow.”
This entire collections process is executed online, with contractors inputting debtor information (e.g., name, address, date of delinquency, amount due) and updating the accounts as payments are received. Data may be entered online at any time of day or night, and contractors have many different options on how to flag accounts, including paid in full, partial pay, suspend (which stops collection efforts), or resume collection efforts.
“Our company’s responsibility is to help the contractor understand that we’re not there to add work but to create productivity, because our system for collection is 24/7 online,” said Fouse.
“We encourage business owners in the HVAC industry to have a defined and disciplined program, so at the point in time at which a balance due is excessive and is wearing out the staff and negatively impacting the business, we can be engaged to assist in collecting.”
Getting paid is necessary if a company wants to stay in business and be successful. To do that, contractors need to keep on top of their accounts receivable and have a plan in place for dealing with those customers who don’t want to pay. The entire existence of the company depends on it.
Contact Ramon Fouse at 972-337-0262 or firstname.lastname@example.org for more information about TransWorld systems.
Publication date: 04/21/2008