Running a successful business demands a spectrum of skill sets that range from the interpersonal to the logistical, but of all of those, effective cash flow management is ultimately what pays the bills. Although collecting on accounts, particularly those that are long overdue, may not be the most pleasant of your responsibilities, advance preparation will spare you frustration and minimize the number of accounts that become bad debts.
Careful planning and precise implementation are crucial to sustaining a growing company, and those assets are exactly the tools required to orchestrate an efficient account collection policy.
Know the Fair Debt Collection Laws in Your State
Begin by familiarizing yourself with accounts receivable and debt collection rules, particularly if you are collecting from individuals. Certain federal and state regulations prohibit businesses from engaging in collection policies that are considered unreasonable; if you’re collecting from businesses, however, you’ll have more leeway. Spend some time researching the Fair Debt Collection laws in your state to ensure that you can never be accused of improper collecting practices.
Track Your Accounts Carefully
It is vital to know exactly what you are owed. Scrupulously tracking your accounts and invoices will ensure that you have an accurate and reliable record of your customer transactions. You should track your accounts by customer, date of service, and date of payment. Doing so will make clear which accounts are paid promptly and those that need frequent finessing and reminding.
Over time, maintaining consistent account records will allow you to develop a customer payment history; you may choose to send customers who often pay late more frequent payment notices. On the other hand, you may choose to look for ways to boost your business and grow revenue with customers who consistently pay on time. Be sure to thank these prompt payers with a note, even if it’s automated. Whenever money is changing hands, a little bit of appreciation can go a long way.
Most business bank accounts have several automated billing and invoicing services for you to leverage, facilitating your ability to carefully monitor and track which invoices have been sent out and which have been paid. There are also dozens of invoicing and accounting software options available to you, some at little to no cost. If you choose not to use your bank account invoicing, or if your bank does not make those tools available to you, spend some time researching third-party systems and choose one that fits the needs and size of your business.
Implement a Collection Policy and Payment Reminder Schedule
Create and commit to a policy of managing your accounts receivable. For example, you may choose to send out your invoices within three business days of services rendered or a purchase made, then a reminder a week prior to the payment due date, a telephone call to the customer once the payment is a day late, and then a follow-up notice if payment hasn’t been remitted within a week of your reminder phone call. After 15 days of non-payment, follow-up with a more stern, aggressive phone call.
Establish this timeline as far out as 90 days. Although most accounts won’t go that far overdue, (especially if you stick to your collection policy and payment reminder schedule) those that do run an increasing risk of becoming uncollectable. The results of a recent survey of collection agency members showed that:
- At 3 month’s delinquency, 27% of accounts receivable are uncollectable.
- At 6 months, 43% of past due accounts are uncollectable; and
- At 12 months, 75% of past due debts will not be recovered.
Furthermore, determine who will be responsible for collecting on accounts, and ensure that they will enforce the collection policy. Choose someone who specializes in customer service and can establish a quick rapport with your customers.
Utilize Payment Terms to Safeguard Cash Flow
Examine your payment terms to ensure that you’re making it as easy as possible for customers to pay their invoices. For instance, although credit cards will take a percentage of the transaction, accepting at least two major credit cards will allow some customers to make earlier payments. Additionally, you should consider requiring up-front deposits from customers who frequently pay late or have trouble making payments, or incentivizing prompt payment with future discounts, reduced shipping costs, or other rewards.
Finally, remember to be flexible when it’s called for. From time to time, a customer may be late on an invoice for reasons other than a resistance to pay. For instance, a customer who is normally prompt in making payments may be experiencing a temporary cash flow problem at their business. In those cases, dogmatically sticking to your collection policy and refusing to compromise with your customer may cost you more than the invoice is worth in the long run – it could cost you the customer, and all of their business.
Careful account tracking, a strong collection policy, and adaptable payment terms will help sustain your business’ continued growth and longevity, putting you in the optimal position to expand. If your business is ready to grow and is seeking capital, Mercantil Bank is ready to help.