09/ 27/ 2007
by Charles R. McConnell
Consideration of how you'll collect from a customer shouldn't wait until the invoice or statement has gone out. Instead, this should be an active concern from the beginning of the business relationship. Unless a given transaction is cash on the barrelhead—where your product is handed over or your service is performed for immediate cash payment— whenever you issue a bill or invoice for later payment you are extending credit.
When you're extending credit to anyone with whom you've not previously done business, you're entitled to check that customer's credit record. This is nothing to be shy or hesitant about; doing so is a normal business procedure. After dealing with a number of customers, you might draw some conclusions about any you may need to look at most closely before extending credit. But for a customer who's new to you, especially if considerable sums are involved, you should be checking that customer's credit rating and, perhaps, asking for credit references as well.
Someone who buys something from you on credit is agreeing to pay for it. For your part, make sure that all the payment terms are clearly stated up front. Customary payment options, some of which have timely-payment incentives built into them, include:
- Payment on delivery (obviously the simplest arrangement)
- Payment due on receipt of invoice
- Payment due 7-14 days (for example) from the date of the invoice
- Two percent discount if paid within 10 (or 15) days, with the full amount due in 30 days
- Late charges or carrying charges added after 30 days
When should you become concerned about payment and initiate follow-up? A good rule of thumb is 30 days; allow no bill or invoice to go unpaid after 30 days without active follow-up. Some in business find it difficult to contact a customer and ask for payment, but the ability to do so is a necessary skill for those who want their business to remain solvent and healthy. Follow-up on unpaid bills is a normal part of doing business.
Follow-up might proceed through some or all of the following steps. These steps may vary according to the amount of money involved and previous experience with the particular customer. Here we're considering a bill due within 30 days that remains unpaid after that time.
- Re-invoice the bill and send it out again, this time noting that payment is late and therefore is expected by return mail, perhaps with the addition of a late payment fee or carrying charge if that's your practice.
- If not settled in a reasonable time, perhaps 15 to 30 days more, re-invoice again, requesting payment and noting the lateness in paying and the imposition of interest, late fees, etc.
- If the delinquent party happens to pay with a check that bounces, re-invoice the bill and require payment by certified check, money order or cashier's check, perhaps even supplying the customer with a stamped and addressed return envelope.
- If not settled as a result of the foregoing, it's time to request payment by telephone and suggest that perhaps some payment schedule can be arranged. Collection by phone works best when done by someone who can apply the right combination of sincerity, assertiveness and diplomacy. It might be implied at this step—usually this doesn't have to be stated directly—that one's credit standing may be at risk if payment isn't forthcoming. This is also the time to mention the possibility of turning the account over to collection.
- If the previous step doesn't work, or if the customer defaults on an agreement to pay according to some schedule, it may be time to turn the account over to a professional collector—a collection agency. It must be appreciated, however, that professional collectors, who concentrate full-time on bill collecting and are customarily fairly aggressive, get to keep a significant percentage of what they collect.
Sometimes a payment delinquency will result from a customer's declaration of bankruptcy. In that case, you can do little more than "get in line" with the rest of the customer's creditors and maybe eventually recover a (usually small) percentage of the debt.
Finally, never get in the habit of allowing accounts receivable to accumulate. It's true that in accounting practice receivables are consider assets in that they have a dollar value, but this is "money" that can't be used for operations. Accumulated accounts receivable may make the business appear healthy on paper, but accumulated receivables are non-liquid assets that can limit the amount of available cash. Ultimately and always, cash is king; no matter how solvent a business may appear on paper, it requires cash to stay in business. And that's the best reason in the world for pursuing those delinquent accounts.
