Tuesday, September 11, 2012

MBE Magazine | Strategies to Collect on Overdue Invoices When Clients Don't Pay

One of the wisest nuggets of business acumen I have ever heard was that a sale is not complete until the money is in your hands. If you are the owner of a small to mid-sized business, you are probably nodding your head in agreement.

We all know that cash flow is the fuel that powers a business and keeps it running smoothly. Common sense dictates that an increase in revenues should also increase the flow of cash into your business. But if your business handles invoices, billing cycles, and customer credit, then this bit of common sense gets thrown out the window. The reality is that customers do not always pay on time, nor pay in full, if they even pay at all. Dealing with these overdue invoices is not just a consumer problem; it is happening on a business-to-business level as well.

Still nodding your head?

Chasing all this tied-up cash flow can end up costing your company a tremendous amount of time, money, and other resources. For this reason, it is essential that your business establish solid billing and debt collection processes. Here are a few tips to consider:

Create a clear and thorough credit policy: Make sure that you clearly outline the terms and conditions customers must fulfill to establish credit with your company as well as the actions that will be taken when accounts are overdue. This policy should be made available to all your customers and can be submitted alongside an overdue invoice. But this credit policy is not just for them, it is for your business as well. Make sure you and your employees review this document so that everyone can remain focused on the key payment collection policies.

Work on your record-keeping: Along with a credit policy, you should make an effort to maintain clear, accurate, and up-to-date credit files and payment histories on each of your customers. There are numerous accounting software suites out there that can help you stay on top of your accounts receivables. You should also make a strong effort to save and organize records of your attempts to collect unpaid invoices.

Send out invoices electronically. Sending out your invoices by email will streamline your billing process and reduce the wait time for customers to be notified about their outstanding accounts. It is also easier to keep records of customer communications since all files will be in a digital format.

Stop servicing a customer who has too much outstanding debt. This is pretty simple to understand. If certain customers are continually failing to pay their outstanding debts with your company, then you have to let them go. Though it may make sense logically, in practice it may be hard to turn down a customer- especially if sales have not been the greatest lately. Nevertheless, you should establish an overdue credit limit beyond which no further credit will be extended until payment has been received.

Be assertive, yet sensible with collection efforts. Trying to collect on overdue accounts is a delicate balance. On one hand, you often cannot afford to be lenient with collection calls and demand for payment letters. On the other hand, there may be instances where you should consider some external circumstances, such as economic conditions, that may affect a customer's short-term ability to pay and make adjustments to the credit policy where it is feasible. Moreover, when deciding how to collect on an overdue account, you should weigh the cost of any collection efforts versus the actual amount that can be recovered.

Don't stop the communication. Once the communication stops between you and your non-paying customer, the likelihood that you will receive even some of your money decreases significantly. All communication should be firm, yet clear and respectful.

Know what action to take and when: Finally, you should be familiar with the different options available for collecting on outstanding invoices or reducing the loss, such as using the services of a collections agency, sending your unpaid invoices to a factoring company, and taking any legal action against the nonpaying customer. You also may be able to claim the loss on an unpaid account for a tax deduction under Tax Code IRC 166, Reg. 1.166.

In short, with a little effort, know-how, and sensibility, you can significantly improve the chances of collecting on your overdue invoices and keep your cash flow flowing.

Rachel Walker is a FastUpFront Blog contributor and business consultant. FastUpFront.com offers an alternative to a small business loan based on future sales.

4 comments:

  1. These are some great tips. Minority business contracts should be very specific on credit policies. If everything is stated outright, it can save a lot of frustration and questions later.

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  2. Good point. It's definitely a problem for most establishments (and startups specifically) to work out a plan to get back at their overdue accounts. Most of the more established businesses rely on long and grueling processes to do this, costing more on the resources. It really is high time the process got streamlined.

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  3. Invoice Factoring Services helps earning cash in advance from the customers for offering the products or services so that the capital requirement can be fulfilled easily.

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  4. It doesn’t matter whether the business is big or small, the cash flow shouldn’t be hampered in the first place. Many businesses have been forced to declare insolvency due to inadequate cash flow. Mostly the small businesses suffer since they don’t have enough capital as back-up. Collecting the due bills is never an easy situation for the business owners. In addition, one has to step up with caution so that the relationship with the client also doesn’t get affected. To avoid such tricky situations, its advisable to ask the clients for upfront payment, at least 50% of the total amount and thereafter, billings should be done at intervals, rather than waiting for full completion and delivery of the goods or services.

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