Collections
Q. I have a collections problem in my small business. Recently, accounts receivable have been growing at a faster pace than revenue. We have a particularly large amount of money in the greater than 120 days past due column. What suggestions do you have for solving this problem?
A. Clearly, cash flow is critical. It’s the lifeblood of every business. Without cash flow, businesses die. However, unless your business requires payment in advance, you will probably run into some customers who do not pay your invoices in a timely manner. We have found that following the four tips below will reduce the problems you will have with delinquent payments.
Be clear about your terms up front – People sometimes do not pay in a timely manner because the terms were not explained prior to credit being extended. Make sure you state your terms clearly upfront. Explain how long the customer has to pay the invoice. If there are penalties for late payment or interest charges, those should spelled out as well. Then, do what you say you are going to do. If you say you are going to start charging interest when payment is late, do it. Forgiving the interest can become a negotiating chip later. Also, make sure you are consistent about following your policies.
Be selective regarding the businesses to whom you extend credit – If you have had problems with a particular customer paying in a timely manner, consider not extending additional credit. Provide products or services only if these customers pay in advance. Over the years, we have worked with a small minority of clients to whom we would not extend credit again.
We have also worked with some large companies and governmental agencies that were extremely slow payers. Further, to get paid, we had to jump through hoop after hoop—costing us time and money. Infrequently, we have spent so much time trying to get paid that it makes working with these groups unprofitable. Going forward, we will build this added expense into the prices we quote these organizations. If that means we don’t get the work, we can live with it.
Pursue collection respectfully and civility – When customers are slow to pay, our experience has been that a polite email, followed by a phone call if the delinquency persists usually gets the invoice paid.
Find out if there was a problem with the product or service you provided. If this is the reason you aren’t being paid, perhaps the situation can be resolved in a manner that is acceptable to all parties.
Remain civil at all times. While it may be tempting, being rude to the person who owes you money is likely to reduce the probability you get paid. You give the person a reason to feel justified in not paying you. After all, you were unkind. We have learned that you catch more flies with honey than you do with vinegar.
Be willing to work with your customers – Particularly if the customer is struggling financially, be willing to work with him/her. We have frequently given people additional time to pay, particularly if they were facing economic hardship. We do however, ask that customers pay something as a gesture of good faith.
Obviously, this isn’t a tactic you can take with a large portion of your customers or your own solvency will be threatened. Nevertheless, you can’t get blood from a turnip. If the customer doesn’t have any money, it is obvious that he/she can’t pay you. With that said, most companies do have some money. Some creditors will get paid something. In our experience, flexibility and asking people to pay something they can afford increases the probability you are one of the creditors that is paid something and usually leads to the best outcomes.
Without question, you have to get paid to stay in business. Following the tips above will help reduce your delinquencies and bad debt write offs.