BusinessTN

Managing receivables ought to be easy. The “ought” is significant, a verb in the subjunctive mood, signaling a contrary-to-fact condition. In fact, it’s not. Mismanaged receivables can bedevil a small business and sink an otherwise viable concept.

According to the Commercial Collection Agency Association, 27% of accounts that are three months past due won’t be collected; 44% are dead after six months and 75% are forever gone if they haven’t been collected within a year.

Given these statistics, it’s no wonder Scott Ritter, a self-taught guru on entrepreneurship, says that when he feels like extending credit, he first sticks his hand in a bees’ nest, wags it around for a minute or two, and then sees what happens. If he doesn’t get stung, credit just might be a good thing. The Scrooge approach may work for businesses that can exist without credit, but for most, it isn’t possible Some kind of terms are assumed to be part of most businesses. In this case, a better metaphor than the bees’ nest would be a “balancing act,” since operating with no credit will restrict business, while too much will bankrupt the enterprise.

The basics of credit are well-known: check out your customers before giving terms to anyone. Wise folks tell you to check them out on a yearly basis. The customers might be paying you, but falling behind some other accounts. If their balances are climbing, check them out before a year elapses. The Better Business Bureau keeps a file on companies everywhere.

Software can help, though it’s no panacea. Software makes it easy to check the statistics: things like average days outstanding and its inverse, yearly turnover. These figures tell you how your business stacks up against others in your field. Also, you can see whether new procedures are having any net effect on the problem.

The software should also make sure that bills and past-due notices are sent out on time. Some experts counsel to send a letter telling clients that a notice is on its way. But since a business owner needs to walk the fine line of getting money in without offending the customer, software isn’t always the best way to tread this line, as computers tend to dehumanize the customer-supplier relationship.

To keep the personal touch, call the client after the product is shipped, preferably two or three days after the client receives it. Find out if quantity and quality were up to promised levels. Ask if there were any problems with installation or operation. That’s just good business. Then, when the bill arrives, a week or so later, it seems like a natural evolution in an ongoing process. Plus, if there is a problem, you can start fixing it right away, rather than a week later. This will do much for customer satisfaction, but it will also speed the collection process. Of course, this is more feasible if your business ships relatively few items. If you send lots of individual widgets at $9.99 a widget, one to each household, you’d be calling lots of households.

Along the same lines, don’t wait until the end of the month to send bills. Include the usual credit terms on the invoice, then send the first bill a week or 10 days after the product, rather than a strict end-of-the-month schedule. Include a specific payment date. Delineate the charges if the balance isn’t paid within a time limit. The charges should increase as time continues. Don’t send more product until the bill is paid. Stick to your guns, which in this case means an overage schedule, and have your software package send all bills so that you know they are sent. If the account is overdue, call and find out if there is a problem Ross Perot says that business is about solving problems, and the best business people are problem solvers. If you have sold a legitimate product at a legitimate price, you deserve to be paid for it.

With communication goes documentation. Clients may have a problem with a bill because it is larger than they expected or because the CPA doesn’t remember that little Billy’s tax return was included in the agreed-upon figure. When this happens, the bill gets thrown into the “needs some work” pile rather than the more felicitous “pay on the fifteenth” file. If the terms of the contract are complete, then the amount of the bill can be settled with comparatively little difficulty. The client (or the business owner) may be annoyed, but the relationship can be saved.

An alternative to the offering of credit is the use of credit cards, which amounts to an outsourcing of your credit operation. Fees for accepting credit cards as payments include a monthly fee for belonging, usually around $50, and a discount per transaction, which ranges from 1% to 5%. In return, the business gets the cash almost immediately and has little trouble with collection issues. Disputed deliveries, however, will still devolve to the business.

For an existing business already extending credit, clients might balk at a new credit facility that involves a credit card. Unfortunately, many clients will prefer to reserve their credit card balances for other needs. As before, the key lies in balancing your needs and client wishes. This caveat does not, of course, pertain to new businesses and their new practices, which can be set up de novo.

When all else fails—the relationship is in shambles, calls aren’t being taken, considerable time has passed, and the money remains uncollected—there is small claims court. In court, for $25 wronged business owners can attempt the recovery of their just desserts. Obviously, using a lawyer will inflate the $25 fee considerably, but perhaps the first visit to the court, with barrister in tow, can be a learning experience, so that subsequent visits can be done solo. In court, documentation is again paramount, so that the weasel room factor is reduced to its logically determined minimum.

This may seem draconian, but think about your profit margin and how (relatively) slender it is. Say you make 15%. Divide that figure into 100% and you get about six. So you must now sell six times your lost receivable to compensate. That’s not insignificant. In the end, the best way to ensure the success of collecting receivables boils down to this: Pay close attention to them. React swiftly to problems. Make sure that an efficient collections process is a top priority. You might be surprised how well everything else falls into place.