Strategies for Collecting on Time and in Full
by Mark Henricks
Collecting payments from customers is not only essential to running a business, it is also potentially very profitable. Reducing the time you wait for payments reduces need to borrow money and pay interest. And collecting on an invoice that you were prepared to write off is almost like finding money. With that in mind, here are a few steps to improve the way you collect:
The answer to on-time payments begins with good policies. Write a clear description of how and when you expect to be paid. State the acceptable kinds of payment, such as check, credit card and cash. Say when payment is expected, such as upon receipt or within 30 days. Describe discounts for early payments and interest charged when payment is late.
You may require customers who pay later to fill out a credit application, since you are, in effect, making a loan. The application helps collect references and sets a credit limit. If you already have such policies, you can often improve their effectiveness by making sure they are adequately communicated to employees and customers. Good policies won’t work if nobody knows about them.
Timely, accurate and consistent invoicing is the next part of collecting. Have a written process outlining when first invoices are sent, and how often customers will be invoiced for outstanding balances, such as weekly or monthly.
Since you can’t manage what you can’t measure, analyze accounts receivable at least monthly to learn how long it takes to get paid on average. Check industry averages, obtainable from your trade association. If you are being paid later than others, examine your credit policies and invoicing for ways to improve.
Set a collections process
When invoicing fails to produce scheduled payment, activate a pre-set collections process. A typical plan calls for past-due notices at 30, 60 and 90 days. Also try to reach the customer by phone during this time. You can often significantly improve effectiveness by asking for a verbal commitment to pay by a certain date. Be sure to document any commitment in written notes.
For efficiency, prepare standard letters to send late payers at approximately 30-day intervals. First, use a polite reminder. Next, ask if there is a problem and offer to help. At 90 days, warn that the bill will be turned over to a collection agency or attorney. At this point or before, stop supplying them until they are up to date.
When invoices go 120 days late, consider a collection agency. Look for one that takes a percentage of what is collected on a contingency basis rather than charging an upfront fee. From your perspective, it can be a good investment. Agencies know debt collection and usury laws which regular businesspeople can run afoul of. But if collections are a continuing problem, consider setting up a dedicated in-house collections person or department. And don’t rely on salespeople to do this due to conflicts of interest.
If you are already doing some or all of this, check with your local county attorney for guidelines on improving check-acceptance policies and collections. Also, some commercial collections agencies offer free model credit policies as a means to engage with prospective customers like you. Whatever you do, think it through and communicate it thoroughly. Few businesses collect on every bill, but the more you do collect, the healthier yours will be.
About This Author
Mark Henricks is a freelance journalist covering business, entrepreneurship, technology, personal finance, health and fitness for leading publications.
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