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Collections – Are You Contributing To Your Own Problem?
For the small to medium size business, cash flow is one of the single most important
factors in building a successful enterprise. Increasing sales is important, but a
business can’t pay its employees or its rent with sales figures. Customers have to pay
invoices in a timely manner for sales figures to be meaningful. When a customer doesn’t
pay an invoice on time, your business is acting as a bank, financing your customer’s
business or personal budget – and it’s often a no-interest loan.
Establishing consistent credit and collections procedures can minimize or prevent
collection problems altogether. Your customers have to understand that there will be
a price to making payments late. If they do, they are much less likely to make late
payments in the first place.
A good credit and collections program has three components:
- Documentation – strong at the beginning of the relationship.
- Collection procedures for keeping track of paid and unpaid invoices.
- Enforcement - A credible threat of further action against customers who don’t pay on
time.
Documentation
The start of each customer relationship is the time to get your documents in place and
make sure your all the parties are clear about a) what the customer is getting from you;
b) how much the customer is paying for what they are getting and when payment is expected
to be made; and c) what will happen if the customer does not pay as agreed. This is
also the time to ask for and get any information you may need later if you do not get
paid, such as credit information, bank references, tax identification numbers, asset
information, etc. You can accomplish these goals through a good credit application and
a good contract. A key fact to keep in mind: Under Massachusetts law, in most cases a
creditor will not be entitled to collect attorneys’ fees and interest unless the customer
agrees in writing to pay these amounts in advance. In the case of large jobs, this is
also the time to establish any lien rights you may want to exercise later, including
mechanics’ or materialmen’s liens, security agreements or assignments of assets to
secure payment.
Collection Procedures
This is the area most often neglected by small to medium sized businesses – and it’s
where the problems usually start. Keeping track of receivables is difficult, often time
consuming work, especially for a small business whose employees are struggling just to
keep up with the current workload, much less worry about who didn’t pay last month’s
bills. However, a small collections problem can become a very large collections problem
very quickly. If you let a customer get away with not paying one invoice and you
continue to render services for or deliver goods to that customer, soon that customer
will owe you for three months’ worth of invoices. It is very important to have a firm
collection letter series in place that automatically (either via a computer program or
under a written procedure) sends out letters to delinquent accounts followed up with
telephone calls and clearly stated deadlines for payment before services and/or
shipments are discontinued.
The Threat
It is very important for you to be clear with your customer exactly when your company’s
collection process will end and the “professional” collection process will begin. Even
if your company has an internal accounts receivable staff, there will be a point where
your company will turn matters over to the processionals, either a collection agency or
attorney. This deadline should be clearly stated to your customers up front and should
not be extended without a firm payment commitment. Being clear and firm will not only
increase the effectiveness of your internal collection efforts, it will make the
collections efforts of your outside collector much more fruitful as well.
Being client service oriented does not mean you have to be a pushover when it comes to
collections. As a matter of fact, shouldn’t it follow that the better you treat your
customers, the better they should treat you? Your customers will appreciate knowing
what the rules are up front and will respond when your company follows through. If
you don’t get paid within the time limits you set, don’t waste your time and effort –
go get a new customer and send the delinquent accounts to a professional collector.
If you don’t follow your own rules, neither will your customers.
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