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Collection Strategies for Any Economy

Written By: Andra L Watkins CPA
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Collections – everyone hates it. Keeping track of unpaid invoices; going directly to voice mail; generating numerous statements; dealing with rude people – collections truly are resource intensive. Wouldn’t it be better to structure the up front process to ensure collections on the back end? In this article, find out how.

Carefully screen potential customers/clients. When selling products or services on credit, perform a credit check to determine the potential customer’s payment history and credit rating. A weak credit history can indicate future payment problems before anything is sold or prior to the performance of any services. By following stringent customer rejection policies, businesses can focus on selling products and services to the only customers who matter – those who pay.

Look for buzz words in initial meetings. When performing services, potential clients generally fall into two camps – those who value what will be done for them and those who will not. Comments like “This is SUCH a luxury for me,” or “Wow! That’s highway robbery!” could be indictors of a potential client who will not value what is done for them. Usually, those clients are the slowest to pay. Reject these clients up front.

Talk about what things will cost candidly. Many unpaid invoices result from simple miscommunication up front about what is going to be sold or what services will be performed. Discussing these details up front can ensure that everyone understands what the final bill is likely to be, reducing the likelihood of surprises that lead to delayed payments.

Find out who is to receive invoices. Very often, it is not the person or group making the purchase decision. Sending invoices to the wrong place can cause unintentional delays in payment and multiple invoice submittals. Part of any customer acceptance process should be obtaining complete contact information for the person or people who will ultimately pay the invoice. This is also a good time to get clarification on whether or not multiple invoices must be submitted to a group for approval before payment.

Ask about other accounting quirks, particularly when dealing with a larger organization. It is common for bureaucracies, be it large companies or government entities, to pay invoices only once or twice per month. Specific questions such as “By what date must our invoice be submitted to be included in the very next check run?” could speed payment from 45 – 60 days to 30 days or less. Set up internal accounting processes to accommodate various submittal requirements.

Be flexible with billing policies. Smaller businesses often have cash flow issues that make it difficult to pay an invoice once per month. Rather than agreeing to spread a monthly invoice over several months, ask a client if they would be willing to receive weekly or bi-weekly invoices for services rendered in smaller amounts. Small business owners tend to view the reduced amounts more favorably and usually appreciate the offer.

Render invoices by e-mail directly to the person responsible for payment unless the customer requests otherwise. The payment clock starts ticking when someone on the other end receives and processes the invoice, not when it is rendered. E-mail reduces the lag time of standard mail and gets an invoice in someone’s hands speedily.

Communicate any changes in an up front quote before committing resources. Very often, invoices languish unpaid because of deviations from what was quoted. Maybe an item will cost more per unit due to an unanticipated event, or a service is more complex and will require more time than initially quoted. Obtaining the customer’s consent to proceed will avoid irritation over an invoice that is higher than anticipated.

Remember that “Due on Receipt” really means “Pay in 30 days” to the typical United States business person. Offering a discount for payment within 10 to 15 days of receipt can be an effective means of putting an invoice ahead of others that are also “Due on Receipt.” Explain the discount process up front, compute the net amount on the face of the invoice, and note it in any message that accompanies the invoice.

Accept credit cards. In times of tight cash flow, businesses will often opt to bridge the gap by paying with a credit card. In the absence of that option, they simply will not pay the invoice until they have the cash on hand.

If all of the above fail, set a standard collections policy and stick to it. Make the first contact at 30 days and the next at 45 days rather than 60 days. The 45 day contact is not typical and can communicate more seriousness regarding collections. Be courteous but firm regarding payment, and offer all of the various options available to process payment immediately.

Collections don’t have to be a stressful drain on resources. Proper thought and communication on the front end combined with effective delivery will lead to a happy customer, and happy customers usually pay their bills on time.

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