A recent study found that half of all small businesses are having trouble collecting receivables. During good times, this is an annoyance. During bad times, it is often the path to an appointment with a bankruptcy attorney.
Collecting receivables requires a plan and a system that addresses collections before the sale, at the point of the sale and after the sale.
Before the sale is complete you should:
- Review the customer’s ability to pay. Big companies use credit reports. But for most small companies the easiest method is to require a down payment from any customer who you do not have a track record with. How they pay the down payment is a good indication of their payment ability. Plus, a down payment lessens your exposure, recovers your costs, and speeds up your cash flow.
- Make sure that your product has value to the customer that is equal to or (preferably) higher than the price that the customer will pay. This is one of the top reasons for slow pay or non-payment. We have all fallen victim to the slick salesperson who gets us to buy something that later we regret. The customer usually “gets even” by slow paying or refusing to pay.
- Offer incentives to prepay. This can be with a discount but I would rather offer a bonus of some sort that actually increases the value to the customer if they pay early.
- If possible, don’t deliver without receiving payment. At a bare minimum, review your payment terms with the customer. The goal is to eliminate the excuse that they didn’t know about when the payment was due. At this point, also keep an eye out for clues that something in the customer's financial ability has changed between the order date and the delivery date.
- Invoice quicker. Don’t wait till month's end. Invoice as the work is completed.
After the sale is complete you should:
- At every step in the collection process remember to keep stressing the value that the customer received. Don’t stop selling!
- Call shortly after the sale to make sure they are happy with the purchase. You are still stressing the value of the product or service they received. If you can’t call all customers, you should at least call the largest sales. (This is often a great time to up-sell to the next level or to sell an add-on product!)
- Have a system that includes some combination of calls and letters that automatically go out to any account that is past due. The squeaky wheel does get paid first. So squeak loudly! Of course remain polite and keep stressing the value of what they received.
- At a certain point (60-90 days after the sale) the owner should call.
- Make sure the customer really felt they received value. If not, the owner should try to fix the problem. This may be your last chance to save a customer.
- Ask them for payment.
- If they can’t pay, the owner should say, “You are a valued customer and I would like to help you by offering a payment schedule.”
- As a last resort, offer a reduced payment if the invoice is paid by a certain date.
- If all else fails, write off the balance and forget about the customer. Don’t waste any additional time and money suing them. Your time would be much better used learning what went wrong in your sales and collection process and getting better customers who value what you are providing and are willing and able to pay.