OPERATIONS: Make Them Pay

It’s inevitable. Sooner or later a client must pay.
 
Landscape contractors typically run on thin profit margins and they rely on a steady stream of cash to operate. Therefore, it’s critical to take measures to ensure payment is received in a timely manner.
 
“Even in the best economy you can anticipate a handful of customers who will not pay,” says John Mikorenda, sales and marketing rep for High Tech Landscapes, a $15 million firm based in Branchburg, N.J. The landscape firm dealt with a dozen delinquent clients in 2007 and Mikorenda expects an impending economic downturn will increase that number this year. “This doesn’t make us nervous,” he adds. “We just accept that there will be more trips to the courts.”
 
Most contractors are well versed in the routine of first making polite phone calls, then sending certified letters and finally filing suit in small claims court, and others are resigned to writing off the debt. However, there are other avenues to ensure payment and recoup unresolved bills.

PROTECTIVE MEASURES. Prevention is the best debt-management strategy. And whether it’s a design/build job or mowing, a solid contract is a landscape contractor’s first line of protection. Tim Turner, president of Windswept Landscape Studios, a $1.2 million design/build firm in Houston, employs a contract that clearly outlines the payment agreement and the penalties for delinquency. Regardless of a contract’s strength, these provisions need to be explained to the client at signing. “When you set the boundaries at the beginning it makes it a lot easier to collect at the end, and to remind people if they start to stray because of some sort of financial issue,” he says.
 
Thorough documentation is another key, contractors say. Clients unable or unwilling to pay will often cite “lack of service” as a reason to renege on a bill. Ross Fletcher, president of Hemlocks Landscaping, a $2 million full-service firm based in Jasper, Ga., has his maintenance crews leave a property service report after every visit. “It documents exactly what they did that day,” he says. “A copy goes to the client and a copy goes into their file back at the office. It’s a great way to document that we did the work. We can show that on this date six months ago we did these things. It helps a lot in case you do get involved in a court case.”  
 
To avoid payment problems, Mark Monroe adopted a credit card-only policy. “This has improved our cash flow tremendously and has all but eliminated bad debt and the costs associated with debt recovery,” says the president of Nutri Green, an $800,000 lawn care and tree/shrub care company based in Fort Worth, Texas. “When we get a declined credit card, we pursue that issue immediately, not after 30 to 60 days.”
 
Credit card auto billing is well worth the 2- to 3-percent merchant processing fee, Monroe says, and it outweighs the resources wasted chasing past-due clients. “We used to spend tremendous resources mailing out overdue statements and making collection calls,” he says. “Now we can invest those resources into more profitable pursuits.”
 
Other billing options are available, too. Web savvy contractors can accept payment through online e-commerce services such as PayPal, says Bruce Phillips, a senior economist with the National Federation of Independent Business in Washington, D.C. And for a fee, a contractor can obtain merchant status through a bank to process credit cards through his landscape company’s Web site. “This gives contractors a more professional veneer,” he says. “And some people like paying on a regular basis online.”

COLLECTIONS. Though a popular option, taking a delinquent client to small claims court is not always a feasible pursuit for the landscape contractor.
 
“In a few instances I consulted with my accountant who advised that it would cost more money to sit in small claims court to collect on $400 just for the principle of it,” Turner says.
 
Others were dissatisfied with the legal process. “In the few instances where small claims court was pursued, I found that we wound up with an essentially useless judgment lien against individuals who have no non-exempt assets,” Monroe says, adding he has never recovered debt as a result of a small claims court judgment.
 
This is the reason John Rennels became disenchanted with the court system. “We do most of our work on contract, so from a legal standpoint you’d think we’d have legs to stand on,” says the president of A Plus Lawn and Landscape, a $250,000 firm based in Lawrenceburg, Ky. “We’d take the delinquent clients to court and they still wouldn’t pay. It was just a waste of time and money.”
 
Instead, Rennels turned to a collection agency to retrieve unpaid funds. It was an appealing option because it took nearly all of the leg work involved in chasing down payment out of his hands. “We’re growing and we don’t have a full-time staff yet, and the office stuff takes an enormous amount of time,” he says. “While this is only a small percent of our clients, when you have to deal with it yourself it adds up to a significant amount of time.”
 
Collection agencies are compensated in a variety of ways, from flat fees to a percentage of what’s collected. Rennels chose a service that bases its fee on a declining scale. For example, the service takes about 6 percent of the total claim it recoups for Rennels, and that percentage is reduced the more he uses the service. The service is also Web-based, which is convenient for Rennels. Once a client is 30 days past due, he enters the delinquency information into the company’s Web site and it takes care of mailing late-payment notices and dealing with small claims court.
 
In some circumstances the threat of collections is enough to motivate a past-due client. “On occasion I will have a client that will go beyond 30 days or more without so much as a phone call,” says Greg Gutknecht, president of Earth Balance Organics, a $72,000 lawn care company in Stone Mountain, Ga. “I will call them two or three times leaving messages. The last message I leave is, ‘I am forced to turn your account over to collections and your service has been suspended until your account is paid in full.’ All of a sudden they call me back telling me how sorry they are and that the check is on the way.”
 
Some landscape contractors take past-due collections into their own hands. “We will make two or three phone calls to the customer,” Mikorenda says. “If there is no response to the calls we will send a certified letter asking for payment. If the certified letter fails, we will then take them to small claims court.”
 
Sometimes, pursuing past-due accounts requires some detective work on the contractor’s part. For example, with commercial maintenance work problems arise when a management company changes mid-contract.
 
“With maintenance work you have a hard time finding the person making the decisions of who gets paid and who’s not getting paid,” says Andy Sherbondy, president of Houston-based Earth Essential, which does about $400,000 in annual sales. “Three or four months down the road there may be a new manager and it’s a whole new ballgame. The next thing you know, you’re not getting paid.”
 
From experience, Sherbondy tracks down the property owner and communicates the situation one-on-one, often appealing as one business owner to another. More times than not, this resolves the situation, he says.

PERSISTENCE. Even under the worst circumstances, many landscape contractors hesitate to use a collections agency or the courts in fear of permanently alienating a client. Often, a solution can be remedied between the contractor and client.
 
Turner, for example, recently had a client balk about the last 10 percent owed on her $30,000 design/build job. Instead of getting frazzled with the client, Turner evaluated the situation and recognized that he’d known the client for some time and she’d referred business to him in the past.
 
“I told her we needed to collect on this so let’s come up with a payment schedule,” Turner says. “But by doing this I’m going to charge you 1 percent interest because of the additional paperwork with accounting.
 
“By doing it this way, as opposed to holding her to the contract and demanding the money, I was able to keep the client and I had my money within four weeks,” he says. “And I got two other referral clients from her.” LL