Imagine you’re nearing the end of your busy season—and has it ever been a busy one! Despite being bone-deep tired, you look forward to your most profitable year ever. Yet, when it’s time to pay the bills, you find you barely have enough to cover materials. Where did all the money go?
If you are like many landscape contractors across the country, your hard-earned profits are locked up in your accounts receivable. More than 46 percent of landscape contractors we recently surveyed admitted that 25 percent or more of their accounts regularly go past due. Considering that profit margins in this industry typically average less than 10 percent, you can see how receivables management can make the difference between feeling flush and scrambling to make ends meet.
Most of us don’t put chasing receivables high on the list of things we enjoy about being in business. However, understanding and implementing best practices in this area helps support everything else you do. Let’s take a closer look at the inner workings of accounts receivable, and how landscape contractors can creatively manage them for improved cash flow, greater profit margins and heightened enjoyment of their businesses.
Take proper precautions
Like everything else in business, proper preparation is half the battle. This includes knowing who your customers are and being selective about them. Not doing so can result in a high rate of non-payment, or even the type of fraudulent behavior one landscape contractor describes like this: “Basically, someone poses as a homeowner and signs up for grounds care services. A month later when the bill is due, they disappear because they were never homeowners to begin with—they were renters. Tracking these people down is murder, and the landlords typically have a hard time, too.”
It’s perfectly acceptable to run a credit check on a person and verify that they own the property before agreeing to work for them. Take advantage of the fact that all real estate transactions are a matter of public record: look up the address to find out who the real owner is and what his or her mailing address is. For rental properties, you may be better off dealing directly with the landlord. If this is not practical, consider requiring prepayment.
When Good Customers Go Bad
Before working out any payment plans or concessions with a past due customer, consider who they are and how important their business is to you. Catering to flaky customers rarely pays off, but, for customers you know well, the risks can be worth it.
Landscape business owner David Rykbost relates how working with a valued client who had run into hard times paid off in the end. “In light of nothing else to do in the recession, I extended credit,” Rykbost shares. “He had been a client for 19 years. I called him every so often and he trickled out the money. It took two years but he paid it in full … I could have stopped work but literally would have had to lay off the crew. Although I was concerned about it, I had faith in our relationship and his character. He came through in the end, thank God! That was probably not the best business decision as it could have been a six-figure loss, but it was calculated and did pay off.”
Careful customer screening should prevent the majority of bad accounts, but it’s still important to have legal backup in case things go sour. A good attorney is like the proverbial “big stick” that will allow you to do business with confidence. Have yours write up and/or review your contract, and never agree to work without it. Your attorney can also clarify any questions you may have about lien laws in your state. Be sure to file a lien before you begin any job that qualifies for one.
Finally, it’s a good idea to start a file for each job you do and keep copies of all of the correspondence. That way if you do end up in a legal dispute, you have the documentation you need to prove your case.
Bill early, bill often
When things get busy, it’s easy to delay invoicing until you feel you have the time for it. However, this can get to be an expensive habit for landscape professionals. For one thing, it sends the wrong message to your customers. When you are late in billing a customer, they may figure it’s not important to you to get paid timely. Their initial excitement about the project may also have already waned by then. You don’t want to bill them right when buyer’s remorse is settling in.
Instead, follow up on completed jobs — especially larger ones — immediately. Do a final walk-around to solve any issues right away and present a final invoice. Doing so should remove any excuse to put off the payment.
Late invoicing can also wreak havoc on your cash flow. “You can’t spend accounts receivable, nor profits on paper. You can only spend cash,” points out business analyst Steve Cundiff. “Be cash-flow centric in your accounts receivable strategy and always collect faster than you pay. If you collect cash slower than you receive it, you’re creating a cash flow deficit that you have to cover out of pocket. This has a huge impact on your ability to fund growth. The more you grow, the bigger the cash-flow gap becomes. You can bankrupt yourself as a result of your own success.”
The same principle applies to ongoing property maintenance jobs. Billing in advance—or at least mid-month—allows you to keep up with current expenses and avoid getting behind with your cash flow.
Luc Limbourg, owner of Green Team Solutions in Wellington, Florida, says that when he takes the time to clearly explain his billing options to new clients, they typically don’t object to paying in advance. “When I present my services and the client agrees on what will be provided, I clearly explain why and how and that if there is an issue we can either work it out amicably or I can refund,” he says. “It’s all in clearly communicating with the client. It also shows your client trust. I have most of my customers’ credit cards on file and bill the month ahead. It avoids me chasing money and shows the customer that I’m serious about my work.”
Integrate receivables with accounts payable
Jim Huston, landscape business consultant of 29 years and owner of J.R. Huston Consulting, based in Granby, Colorado, advises his clients to keep track of job-related expenses. “This is where a lot of contractors get in big trouble. People go in and start paying bills off willy-nilly without being job specific,” he says. “They get a deposit for new jobs so they can pay off old ones. Getting new work and still paying jobs you did months ago is a huge sign you’ve got a problem,” he says, pointing out that “robbing Peter to pay Paul” is particularly dangerous in volatile economic times.
To avoid disaster, Huston recommends using purchase order numbers and tracking all materials bills by the job. “Be specific with your bills for vendors and suppliers,” he says. “Whenever you get a check, you want to tabulate all of the bills with all of the checks for that project. When you complete a project, all of the bills for that job should be accounted for and paid for.”
Monitor and micromanage your receivables
Another way contractors often run aground with accounts receivable is by not keeping track of their past due accounts. “You’d be surprised how many people don’t pay attention to it,” says Huston. Whether you track them in Quickbooks or a simple spreadsheet, monitoring your accounts receivable regularly can reduce or eliminate many problems before they get out of hand.
Ron Binkle, owner of Ron’s Lawn Care and Outdoor Maintenance in Kitchener, Ontario, says that tracking his accounts, along with timely billing and careful customer screening, helps him sidestep most accounts receivable hassles. “I monitor accounts closely,” he explains. “Any balance over 30 days gets a phone call from me and a hold on the account until payment is made. Approximately 98 percent of my customers are prepaid. We generally don’t have many receivable issues, and, if so, they are less than $1,000.”
It’s impossible to prevent all late payments, however. The best and most effective strategy for dealing with past-due accounts is to jump on them fast and hard. This is one area of business where micromanagement is kosher.
Win-Win Payment Options
Cash may be king, but it’s not always the easiest route. Here are three alternatives that may help ease your accounts receivable process:
1. Credit cards: Credit card payments are quick and easy for everyone, and ensure you’ll get paid on time. For customers who are reluctant to go this route, offer a discount as an incentive. If you’re worried about the fee, simply raise your rates slightly to cover it, or tack it onto the bill.
2. Offering financing: Knowing they can make payments on a big job makes it easier for customers to say yes to the sale. You can finance your customers yourself by allowing them to pay over time with interest. However, it’s safer to have a third-party financing company or local bank run the financing.
3. Factoring: Sometimes called “accounts receivable financing,” factoring involves selling your receivables to a third-party financial company. The factoring company takes care of collections and pays you the bulk of the invoice immediately. Once they collect from the customer, they pay the balance, minus a small fee. Factoring can be an excellent solution to cash-fl ow problems.
Try the following sequence for handling sluggish players:
1. Catch it early. Contacting your customers as soon as their accounts go past due shows them you’re paying attention. A friendly reminder call is often all it takes when an account is only slightly past due. Staying pleasant and understanding at this point saves your customers face, and many will actually thank you for the reminder.
2. Keep at it. Don’t let up on past due accounts. Hound them until they pay or you send them to collections. In addition to phone calls, have a series of letters that you send, and be clear that you mean business. Stay professional but assertive, and let them know you will take collections action if necessary. Sometimes just the threat alone is enough to get customers to pay.
3. Work out a payment plan. If the account remains unpaid, ask your customer what the problem is. Work out a solution if necessary, but make sure it works for you as well as your client, and avoid buying into sob stories. Sometimes just putting the customer on a credit card payment plan will do the trick, especially if they are the disorganized type.
4. Suspend services. It’s never a good idea to keep working for someone who has not paid what they owe you. Be sure you make it clear to your past-due customer why you are no longer servicing their property and exactly what they need to do to resume services.
5. Send them to collections. While collection agencies do charge a fee, many lawn care and landscape professionals find they are worth using for tough accounts. “I have a reasonably good track record in small claims court where we typically get interest and fees, however it is time-consuming and sometimes you win but still get nothing,” says David Rykbost, owner of Dave’s Landscape Management Company, based in Hudson, Massachusetts. “Losing 50 percent to the collection company is tough to swallow but better than nothing.”
Your most valuable asset when chasing receivables is an assertive bookkeeper. Many otherwise excellent bookkeepers are lousy at collections. You need someone who is willing to jump on past-due accounts with the tenacity of a junkyard dog. If you can’t find a bookkeeper willing and able to do collections properly, you’ll need to assign someone else to the task to prevent a buildup of past-due accounts.
Protect Yourself From Embezzlement
One hidden danger of accounts receivable is that they’re easy to fudge, especially when no one is watching. “A lot of landscape contractors don’t have prior experience with accounting,” says business consultant Jim Huston. “That’s a huge problem. I’ve seen a tremendous amount of embezzlement or theft … someone can write a check to themselves or a vendor and then go cash it. The check will come in from the bank and they’ll change it in Quickbooks.”
If you are not doing the books yourself, it’s crucial to have checks and balances built in to your accounting system. Huston recommends taking the following precautions:
Familiarize yourself with accounting best practices. Nearly every community college offers accounting courses at night. Online courses are another good option. Some accredited schools even offer accounting courses free online, although you may have to invest in a textbook. Most accounting software companies also offer free tutorials.
Monitor your books personally. “Owners should be the only ones to open up a bank statement,” insists Huston. It is also a good idea to sign your checks personally. Keeping your books balanced and keeping tabs on where the money is going goes a long way toward preventing embezzlement.
Implement a purchase order system. This will allow you to track everything you order and know exactly which job it goes to.
Get support if you need it. There’s no shame in reaching out to a professional. A good CPA can help you set up an effective system and understand how to use it to your best advantage.
Putting it all together
Receivables management for lawn care and landscape businesses largely boils down to four main principles:
1. Taking proper precautions to avoid receivables headaches
2. Developing and using systems that work
3. Meticulously tracking what money you’re owed
4. Billing and following up with customers timely and assertively
If you have been struggling with accounts receivable issues, take the time to analyze and correct any shortcomings in these four areas. When you do, you will probably not only solve your receivables headaches but also enjoy running your business far more as well.