Effective collection policies can help keep your business in business
The grim reality is that as a business owner, sooner or later, you will need to deal with slow paying or nonpaying customers.
In fact, thriving small businesses can find themselves facing financial difficulties when fees for services or products are not collected on a timely basis.
To avoid this situation, the Wisconsin Institute of CPAs recommends that you have a plan in place for collecting and monitoring your accounts receivables and following up on unpaid invoices.
Start with a clear policy – It’s wise to firmly establish your company’s payment terms and put them in writing.
Before you take an order or start a project, let your prospective clients know when and how you expect payment.
Be clear about your acceptance of such things as personal checks, credit cards and the forms of identification required when using these.
Also, be sure your written policy includes deadlines for payments, along with penalty clauses for large amounts that remain unpaid.
To avoid having your cash flow disrupted by slow or nonpaying customers, ask for payment up front. Depending on the type of business and the product or service, this can be full or partial payment, deposit or retainer.
An advance payment may not only help your cash flow, but also secure the relationship between your company and the customer.
Check customers’ creditworthiness – If you sell high-priced items or services that will be paid over time, it’s especially important to check the customer’s creditworthiness.
Remember, when you provide an item or service to be paid at a later date, you are extending credit. It’s not unlike handing $1,000 over to a stranger and expecting to be paid back next month. You need to be sure that customers are creditworthy.
Credit application forms can be purchased at most office supply stores, but a better idea is to have an attorney draw one up.
In addition to providing you with basic contact information and bank account numbers, a good credit application gives you permission to order credit reports and check trade references.
Once the prospective customer has completed the application, be sure to verify the information supplied and call the references to check on their payment experiences.
Invoice promptly – Billing promptly and accurately is key to the timely collection of fees. Don’t wait until the end of the month to bill.
If there is a long time lag between completion of the work or shipment of the order and the date of the invoice, the message to your customer is that it’s OK to be slow.
Before sending out invoices, take the time to carefully check it and be sure the due date, description, amount and terms are clearly stated.
An error will compromise your image and slow down payment.
Another way to ensure prompt payment is to follow your customer’s invoicing instructions to the letter.
Many large companies have precise methods for invoicing. Whether that means sending the bill to one department and a copy to the person who requested the service or order, or including a special vendor identification number, adhering to the rules typically results in a more prompt payment.
Monitor and follow up on payments due – There are many accounting software packages available that will give you tools to monitor your accounts receivables. Basically, you need to know who owes what and for how long.
It is advisable to develop a timetable for handling overdue bills.
Mail a second invoice, with a notation or stamp that says "past due" or "second notice" and follow up with a phone call.
Send late payment reminders early and frequently. Typically, the longer a bill goes unpaid, the less likely you are to recover the funds.
Getting outside help – Sometimes having an attorney send a letter to the overdue account is enough to hasten payment. If that doesn’t work, you may need to resort to small claims court or a collection agency.
Keep in mind that, in most states, small claims courts typically cap the amount you can sue at a few thousand dollars and the process can be time consuming.
If you refer overdue accounts to a collection agency, be aware that the amount collected will be less than what you’re owed. This is because the collection agency may negotiate down the amount due and take a percentage as its fee.
It can pay to be flexible – Although it is vital that you have policies in place, from time to time, it’s wise to be flexible.
For example, if a customer who has made timely payments in the past suddenly experiences financial difficulties, consider working out a flexible payment plan.
Just be sure to collect some amount each month until the overdue amount is completely paid. CPAs point out that while payment in a timely matter is important, so, too, is maintaining good relationships with long-standing clients.
The above was provided by the Wisconsin Institute of CPAs, based in Brookfield, www.wicpa.org.
Oct. 17, 2003 Small Business Times, Milwaukee
