Restaurants across the country have begun to open their dining rooms to guests, signaling that shelter-in-place restrictions are easing.
In a survey to wholesale business owners, the majority of respondents reported that they expected restaurant customers to stop paying their invoices during the pandemic, and Wholesail data shows that they were right. That means vendors are sitting on significant past-due receivables – maybe even the majority of their open balance.
Restaurant reopenings will be a process, one with significant implications for distributors. When working with operators, it’s important to recognize their hardship and show that you’re making an effort to accommodate them during a challenging time – at the same time that you emphasize the need for a strategy to help chip away at that past-due balance. Try these strategies to manage accounts receivable during this difficult time.
Create a strategy to recover the past-due balance over time
In our conversations with wholesalers and restaurants, most recommend giving restaurants the flexibility to pay past-due balances in amounts that feel manageable and fair. Instead of pushing customers to pay off balances by a certain deadline, encourage smaller, more frequent payments. That way, restaurants can pay small sums when they first reopen and gradually ramp up as sales increase.
Consider, for example, a restaurant customer on 30-day terms with four weeks of past-due invoices. If the customer previously spent $1,000 a week with your company, they now have $4,000 outstanding. Let’s say that customer’s sales decline by 50%, so now they’re buying $500 a week. Paying off that $4,000 balance over eight weeks would mean doubling their weekly check to you – probably not a realistic proposition given their current business.
So what is realistic? Maybe you ask the customer to pay for their order volume every week, plus $100 toward their past-due balance (20% more than their weekly spend, or $600 total). At this rate, it would take 40 weeks for them to pay down the balance – but as sales increase and business picks up, many will pay lump sums to catch up.
How Wholesail can help: Once you agree upon a strategy, set up a payment plan with Wholesail to charge the customers’ bank account or credit card regularly up to a specified amount. We’ll pay off invoices in chronological order and automate all the reconciliation in your accounting system. Customers will see reminders that a charge is coming, as well as confirmations after every charge. Even if you have a manual system in place, automating the process will save time and effort.
Establish new payment terms
Under normal circumstances it can be tough to renegotiate terms with customers, but the pandemic has thrown “normal” by the wayside. In conversations, mention that you are asking all customers to reduce their terms so that you can weather the economic storm. After all, cutting your average terms from 30 to 20 days means you need 30% less cash to run your business.
Establishing terms is a trade-off between risk and sales. If you put all customers on “cash on delivery” (COD), requiring payment at the same time that product is delivered, your sales will drop; if you put them all on 30-day terms, your sales will grow, but your risk will skyrocket. Find the balance that makes you the best supplier for your customers while also protecting your business.
Each customer is unique, so customize terms just for them. Consider how much of their past-due balance includes invoices due after or near the COVID-19 shutdown in your city. (If that’s all of their balance, those are good customers.) Have they been ordering from you during the shutdown? If so, have they paid on time? Finally, review their previous terms to understand how they operated in the past.
How Wholesail can help: Wholesail allows you to tailor terms to work for each customer and offers solutions to automatically charge buyers with different triggers and rules. With Weekly Autopay, you can set up automatic payments to pay the balance down weekly – it’s a great alternative to COD and usually means invoices are paid within one to six days. Also, credit card guarantees automatically charge past-due invoices to a credit card on file, so nothing falls through the cracks.
Set a credit limit
A credit limit restricts the outstanding balance that a customer is allowed to hold so that customers don’t accumulate large debts. It can be something you communicate to the customer, but often a credit limit is just a cap that triggers an escalation path within your company. Strict suppliers will set a credit limit and communicate regularly how close a customer is to the limit; once the customer exceeds the limit, they can’t submit a new order without paying down their balance.
As the economy contracts, credit limits can help wholesalers control and manage their risk. Even if you don’t communicate the limits to customers, you can use them to monitor customer balances internally and handle them according to procedure.
For example, if a customer is on four-week terms, you might set a credit limit at five weeks of purchase volume. (If the customer has an outstanding balance you expect them to pay down slowly, include that balance in the limit.) From there, you can track the customer’s open balance weekly, and when they come within 10% of the limit, have an Accounts Receivable staff member contact the sales rep to let them know. If the customer still exceeds the credit limit, do not process new orders without approval from a senior employee. Keep a list of customers who have exceeded the limit and make it accessible to the whole organization.
How Wholesail can help: We can provide recommendations on credit limits for each customer based on their order volume. Plus, weekly reports show how close customers are to the limit, including which ones are at risk of exceeding it and which ones already have. That information can help you streamline your communication with customers, operate with consistent practices, and mind your bottom line.
Learn more about how Wholesail can help your business today.
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