If you’re a company who invoices clients for your products or services, then you know what’s it like to have receivables on your books. Managing receivables can be one the hardest, yet most crucial parts of running a business. This is money you are rightfully owed, and most importantly, you certainly need to keep your cash flow healthy and your business running seamlessly. Therefore, evaluating and continually improving your receivables performance management should be a top priority. Asking for money is never fun, but if you can work to make your receivables management process systematic and seamless, you’ll find getting paid becomes a breeze.
1. Set Expectations Early – If you want customers to pay on time, you need to relay that very early on. Understandably, it seems that this is obvious, but the more diligent you are in explaining your payment terms to customers in the beginning, the better they will be about following them down the line. It’s important to have you customer sign a credit agreement before you ever start doing business with them. This credit agreement should contain your payment terms (do you expect to be paid in 15 days? 30 days?) and whether or not you offer any early payment rewards or late payment consequences. Setting these stipulations early helps clear up any confusion down the road and also shows the customer how serious you are about getting paid on time.
2. Give Your Customers a Hand – When a customer’s payment date approaches and you haven’t yet received the check, keep in mind that the customer is most likely not trying to stiff you. In fact, a majority of your customers who pay late do so because they simply forget. They are just as busy as you are, so as you well know, it’s easy to unintentionally allow things to fall through the cracks. Therefore, it’s important that you don’t let them forget. A few days before a customer’s payment is due, send them a friendly reminder email or letter (whichever is their preferred form of communication). This is simply a courtesy, allowing them to remember their payment date and keeping them from possibly incurring any late payment consequences you’ve set.
3. Follow Up Immediately and Consistently – Not only should you be reminding customer before their payment is due, but it is absolutely crucial that THE day a payment becomes past due, you reach out to a customer to let them know that payment is late. This helps the customer understand that you take late payments very seriously, and immediately gets the payment conversation started. In some cases, you’ll have a customer provide their payment details right over the phone or promise to promptly send the check. In other cases, not so much. Therefore, it’s important you consistently continue to follow up with customers until you receive the payment. This keeps the conversation going, so you always know where your money is or which customers could potentially become a problem.
4. Learn to Work With Your Customers – When you have a customer, despite your reminders, who still hasn’t paid, you need to ask yourself if you would like to keep doing business with them. Most of the time, unless they’re just always a problem, the answer is going to be yes. That being said, it’s important you do your best to both get your money and keep your relationship strong with a customer. Therefore, if a customer appears slow to pay, simply get on the phone, give them a call and try to figure out what’s going. If it’s not just because they’ve forgot, it will most likely because they are waiting to get the cash to pay. Or perhaps, they’ve just hit a hard time. Try to work with the customer. See if you can workout a payment plan that allows them to start paying off their balance in increments. This will help your cash-tight customer, as well as allow you to start seeing some of that money, while confirming the customer isn’t just trying to stiff you.
5. Don’t Be Afraid to Get “Tough” – If “working” with your customer doesn’t, well, work, it might be time to get tough. It’s not time to give up on them but it’s time to let them know you mean business. When an invoice becomes about 60 or more days overdue, it’s time to really change the language in your payment reminder letters to customers. Consider consulting with a collections lawyer to help you rewrite a letter that contains effective legal language. You can even simply let the customer know if you they do not pay promptly, you will write off the debt by reporting it as a “bad-debt loss” to the I.R.S. through a 1099-A filing. This language can really let customers understand they’ve stretched their grace period too long and it is time to remit.
6. Know When Your Time Becomes Too Valuable – There does come a point in chasing payments when it is ok to give up. Your time is too valuable to keep heading down what appears to be a dead end road. In fact, if an invoice ages about 90 days or over, and for sure if it hits 120 days or over, it’s time to try a completely different tactic. Consider sending that account to a collections agency or going to small claims court. Although it certainly should be a last resort, chances are you‘re not going to keep doing business with the customer, so the most important issue at hand is to get your money.
Enhancing your receivables performance management simply requires paying detailed attention to your invoices every step of the way. If you take the time to structure every step, you’ll no doubt see your total days sales outstanding decrease overtime.Meredith Wood is the Director of Community Relations at Funding Gates, an online application for small businesses that allows them to track, organize and manage their accounts receivable all with simple clicks. An avid small business writer, Meredith’s work can be seen on Amex OPEN Forum, SCORE, the Small Business Bonfire and many other small business sites. Connect with Meredith on Twitter @FundingGates.
