Collections problem in small business

QUESTION: I have a collections problem in my small business. Recently, accounts receivable have been growing at a faster pace than revenue. We have a particularly large amount of money that’s more than 120 days past due. What suggestions do you have for solving this problem?

ANSWER: Clearly, cash flow is critical. It’s the lifeblood of every business. Without cash flow, businesses die. However, unless your business requires payment in advance, you will probably have some customers who do not pay your invoices in a timely manner. We have found that following the four tips below will reduce the problems you will have with delinquent payments.

Be clear about terms: People sometimes don’t pay on time because the terms were not explained prior to credit being extended. State your terms clearly upfront. Explain how long the customer has to pay the invoice. If there are penalties for late payment or interest charges, spell them out as well. Then, do what you say you are going to do. If you say you are going to start charging interest when payment is late, do it. Forgiving the interest can become a negotiating chip later. Also, be consistent about following your policies.

Be selective: If you have had problems with a particular customer paying on time, consider not extending additional credit. Provide products or services only if these customers pay in advance. Over the years, we have worked with a small number of clients to whom we would not extend credit again.

We have also worked with some large companies and governmental agencies that were extremely slow payers. Further, to get paid, we had to jump through hoop after hoop — costing us time and money. Infrequently, we have spent so much time trying to get paid that it made working with these groups unprofitable. Going forward, we will build this added expense into the prices we quote these organizations. If that means we don’t get the work, we can live with it.

Be respectful: When customers are slow to pay, our experience has been that a polite email, followed by a phone call if the delinquency persists, usually gets the invoice paid.

Find out if there was a problem with the product or service you provided. If this is the reason you aren’t being paid, perhaps the situation can be resolved in a way that is acceptable to all parties.

Remain civil at all times. Although it might be tempting, being rude to the person who owes you money is likely to reduce the probability that you’ll get paid. You give the person a reason to feel justified in not paying you. After all, you were unkind. We have learned that you catch more flies with honey than you do with vinegar.

Work with customers: Particularly if the customer is struggling financially, be willing to work with him/her. We have frequently given people additional time to pay, particularly if they were facing economic hardship. We do, however, ask that customers pay something as a gesture of good faith.

Obviously, this isn’t a tactic you can take with a large portion of your customers, or your own solvency will be threatened. Nevertheless, you can’t get blood from a turnip. If the customer doesn’t have any money, it is obvious that he/she can’t pay you. With that said, most companies do have some money. Some creditors will get paid something. In our experience, being flexible and asking people to pay something they can afford increase the probability that you are paid something and usually lead to the best outcomes.

Without question, you have to get paid to stay in business. Following the tips above will help reduce your delinquencies and bad-debt write-offs.