For those of you who are starting a business I need to prepare you for collections. I would like to talk about doing business with slow paying customers and establishing a credit policy.
Lots of my clients continue to do business with customers who are slow paying or who do not pay at all. Sometimes they do it because they know the customer personally. Sometimes they do it because the customer has been with them for years. Sometimes they do it because business is bad and they need to keep people working and they will do anything to get business. Whatever the reason it is a bad business practice to do business with customers who are slow paying or do not pay at all.
Here is an example:
I once had a client who did business with many of his long time customers who always paid slowly. When I first went to the client’s office they had $150,000 in over 90 day receivables from these slow paying customers out of a $250,000 total receivable balance. These customers were even slower to pay than previous history, but since they were long time customers no action was taken. Times were tough and these customers knew by blowing off my client’s bill nothing would happen. I immediately put all of these customers in collection and we refused to do business with them in the future. Some of these customers still came back to us and paid COD. Overall, collections improved dramatically.
There is no rule of thumb to determine when a customer is slow paying. It is different for every business and the business owner needs to determine in a policy how many days past due is considered to be a slow paying customer.
Establishing a system of collecting accounts receivable so that your receivable strategy is consistent and timely is critical to successful collections. Here is an example of a strategy that if applied consistently and timely will lead to successful Accounts Receivable Collections:
Assume an invoice with terms of net 30 days
Between the 35th and 40th day contact the customer. If the customer is a customer you know pays within 30 to 40 days based on a history that you have with that customer then do not contact until the 40th to 50th day.
If customer does not return your call or you were not satisfied with the customer’s answer then send a 10 day Demand Letter, requiring payment within 10 days or the account will be put in collection.
If not paid by the 11th to 15th day then put the account in collection.
I always use a collection agency that has a legal staff so that if the account is not collected using traditional collection methods legal action can be taken right away with the same staff that did the original collection and is familiar with the case. I only do business with collection agencies that take no more than a one-third fee and have a legal staff. Once again the key to the collection process is consistency and timeliness.
If you are starting a business I hope I was able to convince you to make a credit policy and stick with it.
