“I can tell you have a lot of customers on payments plans that are behind with their payments.”
I was talking to the manager of a facility we purchased a few years ago.
“How in the world can you know that?” they asked.
“Easy, your delinquency percentage is 27%.”
This post is the third in the Management Series. We are diving deep into the Key Performance Indicators ( KPI’s) all Owners and Managers should be watching. “Delinquency as a Percentage of Income” is the third KPI we’ll cover. (The first KPI was Income Per Month, the second was Occupancy Rate.) But we actually have two issues to cover with this scenario:
- delinquency percentage, and
- payment plans.
Q. What is “Delinquency as a Percentage of Income?”
A. It is the amount of money owed to the facility that has not been collected, as a percentage of the gross monthly income.
Q. How do I calculate it?
A. Divide all amounts owed (delinquency) by the Gross Potential Monthly Income. Most daily close reports actually have this already calculated.
Hint: We track this by calculating Gross Potential Monthly Income on the last day of each month.
A health facility should run around 5% or less of delinquency. The 5% takes into account the 0 to 10- or 15-day, normal late payers who will allow you to collect late fees.
Much more than 5% tells me it is time for an auction.
Much more than 5% tells our Managers that I or my Operations Manager are going to come in and say, “It’s about time for an auction.”
This is where there can be some problems: a lot of Managers and Owners hate having auctions.
We have had some that really hate it. Hate it so much they will do almost anything to avoid selling people’s stuff.
I get it. My wife says I am a soft touch too.
What usually happens is the delinquent tenant has a great reason for why they are behind.
It’s often very real and sad.
They promise they can catch up if you’ll work with them. Let them pay a little here and there and they can soon catch up.
Often, the Managers are their advocates with the Owners, and they vouch for the tenant.
And what ends up happening is 27%, or more, delinquency as a percentage of income.
Look, I get it. Life deals raw blows to good people. It’s dealt some to me as well.
So here is my coaching: never, never, never do payment plans.
I’ve learned the hard way.
NEVER do payment plans.
Your deliquesces will go up. Period.
Payment plans equal high delinquencies.
Even when people pay as they promised.
You are way better off just letting them walk away owing the full amount than doing a drawn out payment plan.
Never. Do. Payment. Plans.
Create a payment policy instead – for instance, if they pay 50% of what they owe, then they can get their stuff and get out. If not, it’s going to the auction.
Get the unit back into service quickly. Especially in today’s market.
But, whatever you do, never do payment plans.
If you have a lot of delinquencies now, spend the next quarter ending your current payment plans. You will see your delinquencies as a percentage of income drop dramatically.
Why is that important? Those newly vacated units will rent back up with customers paying the full rent. Usually, customers paying a higher rate than before (if you’re raising your rents with the market). The income and value of your facility will increase.
Just because you stopped taking payment plans.
If you end (or don’t start) payment plans, and keep your eyes on the four other KPI’s, you will have a great performing facility and a great self storage business.
