While trade credit is not currently the norm in the cannabis market, it will be in the near future. Once there is credit, collections is not far behind.
So, what is collections? Collections is the recovery of outstanding funds from a business which you have extended credit to for products or services.
Almost every company in the cannabis industry, whether they are a grower, manufacturer or service provider, are extending some type of credit to a segment of their customers. Most of the credit extended today is “friendship credit” – credit that is extended to a customer you have known for a while and with whom you have developed a personal relationship. But no real credit analysis was performed.
Friendship credit might be OK in today’s existing cannabis marketplace. But in the future, when trade credit becomes the norm, many of your customers on friendship credit are not going to pay you on time – some are not going to pay you at all. When this happens, what are you going to do?
The following is a common-sense approach to the problem of determining whether a customer to whom you have extended credit – allowing them to pay by check, or giving them 7, 15 or 30-day credit terms – is about to become a collection problem where you may need outside help.
Customers that have a cash flow problem must choose which vendors they will continue to satisfy, and which vendors they will not. If a company has insufficient cash on hand to pay all their vendors on a timely basis, some of their vendors are not going to get paid on time. This can be a one-time problem and things could get back to normal soon, or it can be an endemic problem. If you don’t act promptly, it may cost you.
1. The Customer is Over 30 Days Past Due
The customer has been a solid citizen and always paid on a timely basis. You have transitioned them from paying you cash on delivery (COD) to limited credit terms. But now, they are 30 days past due, and this is not the first time it has happened.
They answer your calls, but promises to accelerate their payments and clean up the past due balance are not met. They may also be showing some of the behavior discussed next.
Chances are that you have a problem, and, depending on how old the debt gets, turning them over to a third party collection agency may save you some money and in many instances, save you a customer.
Getting you paid and saving your customer relationship is the goal of a collection agency.
2. The Customer is Not Returning Your Calls or Re-Ordering
If your customer is past due and ducking you, you have a problem. If they won’t talk to you after repeated attempts to reach them, and their debt is 30-60 days past due and getting older, and they are not trying to re-order and pay down the old balance, a collection agency may be your only solution.
A collection agency works to get your customer to the table to pay their outstanding bills. That’s what they do for a living. A collection agency’s job is also to help repair the relationship, and get your customer to start purchasing again.
3. The Customer Has Started Purchasing Erratically
Over time, the customer has always bought a reasonably predictable amount of product on a consistent basis. Now, this is no longer the case and your salesperson on that account can’t understand what’s going on.
What is causing this erratic purchasing? It is possible that the demand for your product(s) has become highly variable and the customer is purchasing accordingly. Alternatively, your customer is having financial trouble and is having challenges staying current with you, so they are now buying from another supplier.
If other customers are still purchasing the same products on a consistent basis, then the chance that there is a demand problem is small. So, a financial problem may be the reason. This is something that needs to be checked out before it costs you money.
4. The Customer Has Stopped Buying
If the customer has stopped buying and owes you money, even if it’s not past due, you need to be on the alert. For whatever reason, if the account no longer needs you, they don’t have a reason to be prompt. If they go 90 days past due, you are probably going to need outside help to collect your money.
5. You Receive Negative Trade Information on the Customer from Other Suppliers
In this example, as of now the account is not past due. But you receive some negative trade information on the account from other suppliers who are also selling to them.
This needs to be checked carefully. When a company gets into financial trouble, they start allocating their available cash. The more important vendors may not see a problem, but the secondary suppliers find the account is falling behind.
For example, if the account is a dispensary, they need to have flower and concentrates on the shelf and, therefore, these suppliers will get paid first. But if you manufacture infused THC/CDB sports drinks that do not sell as well as flower and concentrates, you may not get paid on time if the dispensary has cash flow issues. If you have relationships with other suppliers, leverage them to find out what is going on.
Companies servicing the cannabis market and extending trade credit will need to implement a collection policy that details how to manage and collect from a delinquent customer. It’s also important to determine your point of no return – when you need to pull the trigger and place the customer with a third party collection agency.
The warning signs listed above are usually evident during your internal collection efforts, and the sooner you recognize them the better.
Remember: Be pro-active with your internal efforts as soon as your customer is one day past due. If the customer is more than 30-60 days past due, a serious problem may be looming and the account should be turned over to a collection agency to maximize your cash flow.
But even if your customer is not 30-60 days past due, you may be about to have a problem.
It’s important to recognize when an account shows any of the behavior discussed here. If they do, you need to get on their case sooner rather than later. Prompt action will save you money.