When Times Get Tough, Receivables Get Tougher To Collect
By Richard J. Maturi
With the current economic crisis, are your customers stretching out their payments or disappearing without paying off their debt to you? If so, it’s time to review the basics and art of collecting accounts receivable without damaging customer relations. First of all, remember the cardinal rule, “It’s your money and you needn’t be bashful about seeking prompt payment for your goods and services.”
Timely Invoices and Billing Statements
The cornerstone of your accounts receivable system is providing timely invoices and billing statements. Every day you delay, is another day you don’t get your money. It helps to know your customers’ payment cycle. If they pay once a month on the fifteenth, and you send out your invoices on the 20th, you missed their payment cycle. By timing invoicing by customer, you may receive payment early, improving cash flow dramatically. If your receivables are large enough, a bank lockbox speeds up collections by eliminating the time it takes to process receipts in-house and deliver them to your bank.
Clearly Spelled Out Terms
Make sure your terms are clearly spelled out on invoices and billing statements. The invoice establishes the existence of the debt and should contain several key bits of information to prevent any confusion should conflict arise. First of all, date your invoice. This helps your customer determine when payment should be made based on the terms (net 30, 2% discount if paid with 15 days of invoice, etc.), which should also be prominently placed on the invoice. Know the current Dun & Bradstreet industry norms for payment cycles so you do not make your terms too stringent and thus lose customers to competitors with more lenient payment terms. Make sure you provide an accurate and complete description of the goods and services received by the customer. Inventory code numbers are great for your computer but mean nothing to the customer.
Accounts Receivable Schedule
Keep a pulse on billing activity and accounts receivable. Prepare an accounts receivable schedule by customer and payment due date. When the payment does not arrive on the expected date, make a friendly call to let your customer know you appreciate their business and inquire what has delayed payment. This usually gets the check in the mail. It lets customers know that you expect payment on time and are not the one who will let things slide. It’s also a good tool to help determine if a particular customer is experiencing financial difficulty. If so, you might try to work out a payment schedule that satisfies both of you. Working with your customer through a rough patch, may make them a faithful customer for many years.
Ask when you can expect payment or if there is anything you can do to help move payment along. If any problems exist, now is the time to get them solved. It may be as simple as faxing a copy of the delivery receipt or other piece of information. Although you certainly want to improve your collections, maintain a delicate balance between being vigilant and pushing too hard, thereby damaging your reputation and possibly losing a key customer.
So what do you do with the late payer? If the phone call did not generate a payment within a “reasonable” time period and you could not work out an acceptable payment schedule, don’t waste any time. Statistics prove that the longer an invoice goes unpaid, the more difficult it will be to collect and the greater chance it will remain unpaid…forever. Don’t let a late payment turn into a bad debt expense. Imposing interest/finance charges typically do not work. If the payment is late in the first place, what chance do you have to recover interest charges? I consider interest charges counterproductive to fostering good business relationships. Likewise, preprinted collection letters do little to generate payments. A personal note would be more appropriate.
If all of the above attempts to obtain payment fail, it’s time to turn to the collection agency or take action to collect your money with an attorney. Sure, these are expensive measures, but receiving 70% of your money is better than writing off the whole receivable as a bad debt. You can be sure you will lose that customer but what good is a customer that does not pay? It also serves as a warning to other customers that you are serious about collecting what is due your business.
With a watchful eye, you can improve your cash flow and prevent bad debts from occurring, even in tough times. HBM