Improving Collections

Collecting money owed to your business as quickly as possible eases cash flow crunches that can hinder your small business' ability to prosper and grow. Encouraging customers to pay you rapidly is a matter of establishing routines and policies that improve the way you invoice and make it easy for customers to pay you on time.

Here are some basic steps you can take to improve your small business collections procedures.

Check credit
If you anticipate significant business from a new customer, it's a good idea to check their credit first. Major credit reporting agencies such as D&B, Experian, Equifax, and TransUnion provide detailed reports on many businesses. However, credit reports are not perfect and a good credit report does not guarantee timely payment or vice versa.

Request up-front payment
While you might feel awkward asking for payment before anything is delivered, and you may want to get started on a project right away rather than waiting for a check, requesting an up front fee is a great way to minimize your cash flow exposure, especially on major projects. Depending on your offering and industry, you might ask for anywhere from 20 to 50 percent up front, with the remainder due as milestones are met.

Create an invoicing system
To nip late payment in the bud, provide easy to understand, complete and accurate information on your invoices. Invoices should include the date; amount due; a purchase order or vendor number if applicable; a memo explaining the fee (or better yet, itemized charges); an invoice number; your company name, address and ID number; and a contact name and number.

Confirm all details before sending out any bill that is not routine, especially your first invoice to a new customer. Be sure to clarify who should receive the bill; sending the invoice to the wrong person can delay payment by up to 60 days or more. Call the client's accounts payable contact to confirm that they received the invoice and that they have the information they need to process your payment.

Provide terms
Payment terms can provide a strong incentive to your clients to pay promptly. For example, some businesses offer a discount of one to two percent for early payment. Some businesses also charge one to one and a half percent per month for late payment. Be sure to state these terms clearly on your contract or invoice.

Invoice promptly
Some small businesses create invoices every two or three weeks, or wait until their bookkeeper comes in, which can delay payment by up to 30 days. Get in the habit of sending invoices out within a day or two of project completion or product delivery.

Assess customer satisfaction
No matter how effective your billing system, you may find that customers delay payment because they are not satisfied with what you delivered. Be sure that you have a process to measure customer satisfaction. Be proactive by conducting a formal annual customer satisfaction survey, discussing a project informally after completion, or including a satisfaction survey with each shipment.

Create an accounts receivable tracking system
Imagine a basketball game without a scoreboard. That's how you're playing the game without a regular update on your accounts receivable. If you don't have one, work with your bookkeeper or CPA to create a weekly report that shows the amount of receivables by age (i.e. not yet due, one to 30 days past due, etc.). The report should identify specific clients so you can take corrective action on a timely basis. Many bookkeeping software programs will also do this for you.

Create a collections program
A receivables collection plan can help you speed payment and avoid expensive and contentious options such as an attorney or collections agency. Start with a call to ensure that an invoice was received. Once an invoice is past due, a polite visit, call or letter may be in order. Personal visits can be an effective tactic since you can learn the most about your customerís ability and willingness to pay. If you choose to send a letter, you might want to have an attorney draft it to demonstrate your intent. Whatever methods you choose, always be aware of collections laws to avoid charges of harassment.

Use a collections agency
There may be instances where a customer simply won't pay. In these cases, a collections agency may be the right solution. Don't expect to receive your entire payment, though – a collections agency's commission can be as high as half the outstanding debt. Calling in an agency can also send a message that you're willing to end the client relationship. But for those instances where some collections are better than none, a collections agency may be able to help.

Be flexible
Your collections plan should balance your need for cash with the value of customer relations. Before taking aggressive collections steps, consider the importance of your client relationship, as well as extenuating circumstances such as a merger, corporate reorganization or relocation.