03/ 05/ 2002
Small businesses can get into a cash crunch quickly and unexpectedly. This isn't meant to alarm. Rather, it's a reminder that your cash flow could suffer if only a few of the customers you've extended credit to decide to withhold payment. In today's Workshop, Jeffrey Moses shows how to attack the situation before it becomes a crisis.
Never wait until you're in the middle of a cash-flow shortage to start bringing in all credit payments owed to you. Every company needs to be on top of all credit schedules, monitoring overdue payments. Whatever the terms of credit you've extended, when payments are due, you should contact the accounts within a very limited time period. Far too many small businesses are reluctant to pick up the phone and begin collection procedures -- but it's the best way to keep your own operations flowing smoothly.
Here are a few ways to handle this situation before it becomes a crisis:
- First re-send your original invoice. Write on it, or enclose an accompanying letter stating that the payment is overdue. Be sure that the letter and invoice contain specific information about when the original invoice was sent, how much is due (including all credit terms issued), and how overdue the payment is.
- Sending a second letter requesting payment is fine for large companies with extensive cash flows. For small businesses it is usually a waste of time. You're going to need to get on the phone, speak with the person responsible for sending out the check, and make sure that the check is written and mailed as quickly as possible. For information about how to handle this situation effectively, please see the former Workshop "How to Make Collection Calls."
- When making collection calls, you'll hear over and over again: "I'll get the payment off to you as soon as I can." That's not good enough, because "soon" rapidly becomes "much later." If you're reluctant to be firm with customers, just remember that your own creditors will be plenty firm when they expect payment from you.
- Some business consultants advocate suggesting that overdue customers at least pay something immediately -- 25% or 50% of their balance due. This strategy probably should be used only when you're in need of immediate cash. It can get some quick money in, but may further delay complete payment. It's human nature for your customers to think: "I've paid 50%, they can wait for the rest." This emphasizes the importance of contacting overdue accounts BEFORE you really need the money.
- One of the most effective ways to keep customers' accounts current is to offer percentage discounts for early payment. This has to be clearly defined at the time of sale, however, and doesn't work when trying to collect overdue accounts.
Always remember to avoid getting so involved in the process of business (marketing, production, selling, distributing, etc.) that you overlook the all-important end goal: getting in the money. By keeping alert to overdue accounts, you can help keep your business on an even footing. This is perhaps the best foundation for the future growth you plan to achieve.
