Getting Paid What You Are Owed by Enhancing the Collection Process

Nothing can bog down a business like slow-paying or non-paying customers. By instituting a best practices collection process, businesses can reduce the cost, time, effort and awkwardness in getting what's owed to them:

Very few businesses genuinely look forward to the process of collecting on unpaid amounts due. The conversations with those who owe money tend to feel awkward and aren’t particularly fun for either party. For this reason many business owners and managers tend to delay confronting the unhappy reality of attempting to collect, which isn’t healthy for cash flow and the business.

Adding to the unpleasantness of the situation is the fact that unpaid receivables, and the time and effort spend collecting on them, inflict additional costs in the form of increased expenses and wasted time. This has implications for both cash flow and profitability.

Fortunately there are a few simple ways to enhance the collection process and increase the likelihood and speed of being paid amounts owed, all while taking the emotion out of the process.

Start by making sure to always write up any important terms of business offered to your customers. There’s no reason for credit arrangements and payment terms to be unclear or poorly documented. Most customers prefer to see up front and in writing when payments are due and the implications of delayed or missed payments.

If there are penalties for late payment, such as the accrual of interest or late fees, it’s important that these are also well documented and provided in advance.

Next, it is a also a good practice to communicate progress and billing arrangements for any ongoing projects so that your customers know what is owed for work already complete. In the event of late or non-payment there is always the option of stopping work until the customer resumes timely payments.

Should a customer fall behind in their payments reach out to them immediately.  Delaying communication because it feels awkward or uncomfortable doesn’t do anyone any favors, and there are some customers who may not bother with payment arrangements unless they hear from you.

When appropriate provide a reasonable level of flexibility, particularly for long-time business-to-business customers. It is a rare business that has never had difficulty at one time or another with cash flow, and when dealing with a trusted customer being flexible in your approach during times of distress can often increase loyalty to your business. Of course, any revision to payment terms should be communicated up-front and in writing so that there are no hard feelings in the event of a miscommunication.

And of course when all else fails hire a collection agency. Most agencies will charge a pre-arranged amount on a per-customer basis (or per-invoice) or instead ask for an agreed upon percentage of any money they recover.

While this is rarely the cheapest option in terms of the bottom line it’s worth pointing out that getting part of something rather than all of nothing is usually a good bargain.

Make sure to engage any collection agencies for a set length of time so that if they fail to collect it’s possible to move on to another agency or resume collecting on your own.

Agencies vary widely, so be sure to review the marketplace and find a partner that’s right for you. Not only do their financial terms vary but different agencies use widely disparate levels of confrontation to collect on debts, and these methods can have an effect on your brand. It’s probably best to ask for references or samples of their collection materials to verify that their approach is a good fit for your business image.

Sometimes simplifying collecting by selling accounts receivable is the right solution.  Companies that specialize in buying delinquent collectables are known as “factors”, and they provide payment immediately in exchange for a portion of the amount due. This can avoid the unpleasantness of collection efforts and help return your attention to running and growing your business instead of worrying about customers who are behind on their bills.

Addressing past due accounts is no fun, following these simple steps and communicating in a clear and ongoing fashion can make it more manageable for both parties. Most important is to make sure you take steps to protect the cash flow of your business - after all, without cash a small business doesn’t usually last long, so staying on top of unpaid receivables can be a matter of business life and death.