You know those invoices your clients haven’t paid yet, even though they’ve received their product? Those outstanding dollar amounts are your Accounts Receivable (AR), and it’s becoming a major problem in the cannabis industry for a lot of reasons. You can’t pay your bills with theoretical revenue.
As always, the government’s response is to put their hand out for EVEN MORE fees and fines for operators who can’t/don’t pay their bills (because adding more expenses to a struggling business is how we fix it, right guys?).
There are more constructive actions you can take to help your clients get back on track and that’s exactly what this guide is all about! Let’s get right into it.
Obviously, getting more funds into your bank account is a win, but it goes so much deeper than that. Every day your money sits in another brand’s account, you are losing income. Although the face value may be the same, the Accounts Receivable total is continually losing buying power thanks to inflation. You can buy less and less with that same amount as time goes on.
Less obvious is the ‘time value of money’ — the concept that having a sum of money right now is worth more than having that same amount later, due to the earnings potential.
For example, if you have $100,000 in accounts receivables, that amount could be used to:
All of these ideas will improve your earning potential and profitability. But, with that $100,000 sitting in your clients’ bank accounts, you’re forced to wait while they use those funds instead.
For a more detailed explanation of ‘time value of money,’ we strongly recommend taking a look at Investopedia’s Time Value of Money article.
Before you can start improving your financial management and reducing accounts receivable, there are a few metrics you need to be tracking from day 1. They’ll help you replace gut feel with tangible numbers so you can see if you’re making progress or not.
Here’s what you need to be tracking:
If you’ve been relying on feel for how your AR is tracking, that ends today. You can’t fix a problem that you don’t measure so it’s important to know exactly how much is owed to you, to the cent. Once you have that figure, track it on a regular basis—at least monthly.
The best way to do this is by using a proper accounting platform and keeping it up to date every day. This’ll keep your accountant happy, make tax time slightly less stressful and let you see that AR figure in almost real time.
Your DSO is the average amount of time it takes to collect payment for an invoice. This metric includes both current and overdue invoices, but only for credit sales. Cash sales are excluded because they do not contribute to your AR.
Measuring your DSO comes down to a simple formula:
Standard DSO = (ending total receivables / total credit sales) x number of days.
Let’s run through an example of this formula in action. At the end of the month, let’s say you have $100,000 of AR owed to you. In that 30-day month, you also made $80,000 in credit sales. Your standard DSO formula would look like this:
DSO = ($100,000 / $80,000) x 30 = 37.5 days
This shows, on average, your customers are taking 37.5 days to pay their invoices.
These terms can get confusing so let’s jump straight to an example for this one. Let’s say 80% of your customers pay on time and 20% pay late.
DSO will monitor the average time your entire customer base takes to pay. ADD gives you that same metric, but focusing purely on that 20% who pay late.
This metric is great for tracking the severity of those late payers.
Now that you’re tracking your total AR and the important averages, the only thing left to monitor is your outliers. Those 2 or 3 customers that are really behind in their payments and blowing up your AR, DSO and ADD.
It’s important to know exactly who those customers are so they can be addressed directly. If those 3 represent 70% of your AR, this is where your focus needs to be in the beginning since it’ll obviously yield the highest impact.
Now that you’re set up for success, it’s time to get down to business here. These are the changes you can start implementing today that’ll help you get that accounts receivable number under control and keep it there.
Focus on building sustainable practices rather than quick fixes — unless you want to end up back in this hole in 6 months, these changes need to be permanent, not just something you implement this quarter.
All good accounting platforms have the functionality to do the tedious, repetitive (but important) tasks that help you get paid on time. For example, at a minimum you can automate:
Automating these simple, repetitive tasks frees you up to focus on other things while also giving your customers a gentle nudge. It’s also helpful insurance against the “I never saw an invoice from you” when they’ve received 4 separate emails about it.
If customers genuinely don’t know what your payment terms are, you can’t exactly fault them for paying late. Those terms are important to your bottom line, so make sure your customers are crystal clear on the expectation, then start enforcing it.
Here are a few great ways to do that politely:
If you’re letting customers sail past that payment due date with zero repercussions, at least 50% of the responsibility is on your shoulders.You don’t want to hear it but we both know it’s true.
Once you’ve made your terms clear and reminded your customers about it, start enforcing those payments. Give your late-payers a call to chat about it and work with them to get a solution in place (then, be strict about that plan too).
Following on from that previous point, being strict doesn’t mean throwing your weight around, it just means giving customers a reason to pay on time. You’d be surprised how far a 3 minute, polite phone call will go to getting that accounts receivable number down.
In today’s market, a lot of the delinquent accounts are the result of financial struggles rather than complacency or defiance. Working with those customers to come up with a manageable solution helps to get money in your bank while also building a stronger relationship with them.
Besides, setting cut-throat expectations for a huge outstanding amount is only going to burn bridges and cost you future revenue. Take the time to understand their situation and collaborate on a workable solution.
The easier you make it for customers to pay you, the faster and more consistently it’ll happen. We all procrastinate those annoying, time consuming jobs, leaving them to be done “tomorrow”. If your payment options make paying your invoices one of those irritating tasks, it will be put off until “tomorrow”.
With so many great options out there now, there’s really no excuse for anything short of a seamless experience.
Consider what other payment options you allow right now and whether or not it’s realistic to offer more. And no, “we’ve always done it this way”, and “well this is how we take payment so deal with it” are not valid responses (even though they’re frustratingly common ones). Be part of the solution.
The best way to fix the late payment issue is to remove the possibility entirely. This won’t be an option for some operators, if it’s something that’s available to you, it can be worth the cost of the billing platform.
With that pre-authorization, you can either bill monthly or once goods have shipped without the customer having to do anything beyond signing the initial agreement.
Depending on your brand, you may run a hybrid setup. Regular invoicing for most clients, and pre-authorized debit for your serial late payers. The penalty being that they have to cover the 2-4% surcharge as well.
Customers won’t pay early unless they have a reason to—so give them one! This can come in many forms, including:
Many of these give them a reason to pay early without costing anything, making it a win-win. While it won’t fix your serial late payers, it will boost the funds in your bank account and lower your DSO.
Let’s face it. There are some customers who just won’t (or can’t) pay their invoices on time, no matter what you do. These will always be the ones destroying your AR metrics and hurting your business, which warrants more drastic measures.
Since they can’t be responsible with credit terms, switch them over to cash sales until they’ve caught up on their outstanding balance. It’s not an ideal outcome, but if you’ve tried everything you can and they’re only getting worse, you need to make a change.
If you’re struggling with a significant amount of AR, you may even want to consider some specialist AR software to help you get it back under control. Especially if you’re one of the many brands right now with >$100,000 in AR,then investing in software is likely worth the added expense.