Every business, regardless of size, industry, type, or form of ownership share common elements. First, every business at one time or another either accepts Credit from a Vendor or gives Credit to a Customer. It is almost impossible not to be a Creditor or Borrower in this day and age.
The main purpose of being a Borrower is to put off paying the invoice until the last possible moment. The last possible moment is when by contractual obligation or action the Vendor forces you to pay immediately or face their wrath. Penalties for non-pa yment of their invoices range from interest charges, suspension of service, collection procedures and finally court action to recover your debt.
The focus of this article is to give you, the small businessman, some sound techniques to use in the collection of your Receivable. These techniques, require no particular outlay of cash, no decrease in the value (discounting) of the receivable, and if d one properly, no hard feelings between you and your customer. The first rule of Receivable Collection is Don't lose your customer, if at all possible.
It is not always possible to live up to this first rule, but, if the collection process is done improperly, none of your customers will want to do business with your organization. Rule number two is Always be polite! You can be stern, but always polite . No one appreciates being yelled at, or given empty threats. Rule number three might be the hardest rule to follow, since most people tend to keep very poor records. Rule number three states Keep accurate records!
I will now describe a relatively easy technique to c us d during the collect receivable. First and foremost it is important to have an accurate accounting of which customers owe you money, how much, which invoices, etc. (See rule number 3.) Depending on the amount of activity of your business, you might have to collate this information daily, though most people will be able to collate the aged receivable on a weekly basis. A computerized accounting system is the perfect vehicle for the collation. In a ddition to the amounts owed, the name and phone number of the highest decision maker you are able to talk with should be available along with your customers accounts payable clerk.
Determine your credit policy and acceptable delays in payments. An example would be terms such as Net 30 Days with payment made within 45 days as an acceptable cost of doing business. If you make this assumption, then you are saying that your Average Ag ed Receivable (Total (Accounts Receivable/Previous Months Sales) * 30) of 45 days or less is acceptable. If your Total A/R is $150,000 and last months' sales were $100,000 then 150,000/100,000 = 1.5. 1.5 multiplied by 30 = 45 days.
Using this assumption, you should have an aging that groups sales into the following groups, Current (under 30 days), 30 to 45 days, 45 to 60 days, 60 to 90 days and over 90 days. If obtaining this aging schedule is not possible then use Current, over 3 0, over 60, over 90 and over 120 days will suffice. Start with all accounts that are 60 days. These account receivables will be easier to collect then the older ones, and as you phase in the new procedures, you should have very few invoices aged at over 90 days.
First, call your customer and request payment for the Receivable. Always follow rule number two, be polite. Request why the invoice is not paid. Get explicit reason. Write down the exact answer given by the clerk. Ask when the invoice will be to be p aid. Record this information. Should the clerk claim non-receipt of a specific invoice or use another stall, inquire why they have not requested, prior to this time, copies of the information. Immediately send by fastest (and most cost effective metho d, {use common sense}) method the requested information. Call, based on method sent, the clerk you spoke with, or the person to whom you sent the information and make sure they received the documentation. Always follow rule number three.
Ascertain the exact date when the invoice(s)will be paid. Make sure you find out the date on which they cut checks and then on which date they mail the checks. Call your contact a couple of days before the check cutting date and verify that your check w ill be cut. If for some reason the check is being held, remind the clerk of each of your prior conversations, and those actions taken by your office. Request a reason why they are not living up to their verbal contract to pay for the goods and/or servi ces provided them. If your contacts answer is insufficient, ask to speak with the highest decision maker mentioned in an earlier paragraph. Again, remember rule numbers two and three.
Once you receive confirmation that the check has been cut, call back a day or so later and make sure the check has been mailed. If your customer hasn't mailed the check, go through the procedure used for non selection of invoice in the preceding paragrap h. If your customer lived up to his work, their invoice will be paid in short order. If the check is delayed past what would be normal mailing time, again go through the procedure described previously.
Now you are thinking, what if no one will answer my questions, or send a check. The following techniques should be used. First, attempt to speak with the President of the company. If you are successful in getting the President on the phone, go over ev ery conversation you have had with the employees of his/her company. Get his verbal agreement to pay the over due invoices. Immediately send him a confirmation letter by registered mail detailing your conversation. Follow the standard procedure to make sure the check is coming.
If this is unsuccessful, you alternate sources to speak with the Companies President. Utilize outside Salesman, other Customers or Vendors who do business with your customer and then send a telegram to your customer. The telegram can be short and to the point. Tell them of your difficulty in receiving payment. Give them a time limit to either respond or send a payment. Make a promise of action should you not get a response. Follow through on your promise should they fail to respond on time.
At this point you have several options, a) send the account to a collection agency (who will do exactly what you have just done), b) report them to Dun & Bradstreet and/or other credit agencies or c) bring a court action against them. Explain in your tel egram the exact procedure you intend to use, should they not respond. Express your unhappiness at having to take these steps and at loosing their future business.
Once the older receivables have been tackled, begin a new policy which will assure that very few receivables become old receivables. If your terms are Net 30 Days, on the 31st day call your customer and ask if a check has been cut on the invoice. Remind them that the terms are Net 30 days. Do this with the utmost politeness. Record their answers and follow normal procedures as to the collection process. On those accounts who historically pay within the acceptable range, you can eliminate most of the perfunctory calls.
Following these steps, I have been able to reduce a manufacturers receivables from an average of 87 days down to an unbelievable 37 days (the industry average was 42 days). This transformation took three people two and a half month of phone calls, resear ch and prodding by our collection staff, their outside sales force (manufacturer rep's) and occasionally the President of the company. These techniques can work for you.
SBA * Consulting specializes in the installation and implementation of Integrated Accounting Systems on both DOS (Novell) based and UNIX based systems. SBA * Consulting seeks out Start-ups and Turn-a-round situations. SBA * Consulting has at its disposa l a group of seasoned professionals, from Marketing to Programming, Manufacturing to Accounting, our Associates are active in both civic and professional societies. SBA * Consulting is unique in that is does not sell or re-sell Hardware or Software, they just provide hands' on Consultation services. SBA * Consulting can be reached at (516) 221-3306.