“As much as we love providing services to our customers, we like to be paid too!”
Can you imagine yourself saying this to your accounting professional? Or is this something that you are thinking right now as you are looking at your receivable list? Ironically, this was the beginning of a conversation that started my customer’s journey to seamless automation for their receivables.
As an accounting professional, my first three thoughts were:
- Why was there a receivable list?
- How can we eliminate the list?
- What processes can we implement to eradicate the problem?
Knowing that no business can run indefinitely without a consistent cash flow, we needed to analyze why our customer felt that their current processes were not working for them. And that started with answering the first question: Why were there receivables?
The Accounts Receivable List
Right away we noticed that our customer was billing after services had been provided to their customers. In certain business models this works fine, but we could see that we had a potential problem brewing with accounts not being paid in a timely fashion. They would provide services for a month, bill at the end of the month, and then not get paid for potentially two to four weeks. Consistently tying up earned revenue for over an extended period of time.
As a current mentee of Ronald Baker and the Value Pricing Model, one of the takeaways we had was billing and collecting payment before any service was provided to our customer. Fundamentally, this concept could be easily applied to daycare centres based on the services they provide.
How to Eliminate Accounts Receivable
As we explained in our meeting with the directors, they are expected to pay for salaries, utilities, food and sundries, and all other expenses prior to being paid by their customers. Why not get paid for the work they do BEFORE they do it? And if a customer was not willing to pay the price for the services, then the daycare and the directors were not out of pocket for the expenses to care for the student in their charge.
By implementing this change we would ultimately eliminate any accounts receivable, putting the daycare in a better cash flow position.
We sat down and discussed this concept thoroughly with the directors during a two-hour meeting. In this meeting, we designed a plan to inform the parents of the change to the current policy. The first item on the agenda was to collect on the current accounts receivable (and yes, each parent had a balance because of paying after services were rendered) in a maximum of three payments.
Getting Customers Onboard with Automation
We created a package that each custodial parent would receive that provided them with a letter that explained the change in payment schedules and outlined a payment schedule that allowed for any balances to be paid over a series of three months. In that same package, we provided them with a PAD (Pre-Authorization for collection of payment) agreement for future payments. All custodial parents had six weeks to provide the signed documentation back to the daycare, and from there, we would start setting up the appropriate collection method on a going-forward basis.
The directors of the organization expected that there would be some pushback from the parents and thankfully we were proven wrong. Less than 1% of the parents had difficulty with the situation, and they decided to take their business elsewhere.
Happily, this was the first step to eradicating the accounts receivable issue. We still have some serious work ahead of us to minimize or eradicate the problem entirely. Follow us on this multi-step process, and we will continue to update you on the progress.
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Until the next time,