Thursday, June 11, 2009

5 Tips for Credit and Collections

This is part of a series of blog entries for businesses from Charles Alexander, the Director of the Tennessee Small Business Development Center at Vol State.

In this economy, customer budgets have been stretched to the max. As many of you may have discovered, the last person to get paid may be you, the business owner. Although it may be understandable from the customer’s point of view, you are in this recession as well, and the people you owe money to (insurance, rent, loan, payroll) will not care that you have not received all of your money. According to the Commercial Collection Agency Association, the probability of collecting on a bill drops to 70% after 90 days. And it plummets to 23% after a year.

So what is the best way to handle slowing payments? Do you kick and scream for your money? Should you just bury your head in the sand and hope that it all works out in the end? How about a happy medium? Let’s take a look at some proven collection methods. I’ll warn you there are no silver bullets or magic pills, just good old fashioned proven processes.

1. Create payment guidelines and get it in writing – This will create clear expectations of prompt payment. Make sure that the payment guidelines are on your order form, brochure and/or Web site. Also make sure they clearly spell out your terms of sale and payment options. Do not use generic terms, such as “due on receipt” and then not follow through. This will set the wrong example. If you say due on receipt, and the customer doesn’t pay immediately, then penalize them for late payment.

2. Review Accounts Receivable reports frequently – Assuming that you have an accounting system in place, you should have an Accounts Receivable report that you can review at least on a weekly basis. This report will tell you what customers are 30, 60, and 90 days late. If you make this analysis a recurring task, just like processing payroll or any other weekly task, you will make it a habit of being informed about collection issues.

3. Send a series of reminders – As soon as the payment date is missed, you need to have a system in place that reminds the customer. Using letters, emails, or phone calls will work. You can use software, such as QuickBooks®, to assist you in setting up reminders and even for processing collection letters. Also if you have a late payment charge policy, you need to enforce it each time.

4. Be consistent with your collections process – One of the toughest things about staying on top of the collections process is getting too comfortable with the status quo of a tight cash flow. Sometimes you may think it is easier to put the pressure on yourself, your business, and even your family then it is to listen to hard luck stories or to chase deadbeats. But the simple truth is that your business and your stress level will be in much better shape if you are willing to make the tough decisions.

5. What to do if all else fails – Many of you know that you will not always win in the collections process and there has to be some type of resolution. You may have to sacrifice at least 50% of the debt to collect anything at all. This may mean that, at some point, you may have to be willing to sue or send the debt to collections. Either option may be costly, but if the debt is significant enough it may well be worth it. Sometimes you may just need to know when enough is enough, and give up on the debt and chalk it up as a lesson learned. I would suggest that should always be your last option.

If you have any questions on what is legal and what is not legal you can always review this link to make sure that you are following federal guidelines:

http://www.ftc.gov/bcp/edu/pubs/consumer/credit/cre27.pdf

You can reach Charles at Charles.alexander@volstate.edu

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