The challenge of collecting the money owed to your business seems to be one of the biggest headaches for all businesses. For startups, needing the cash flow to keep afloat it can be one of the most discouraging aspects of the business. Looking at what is available on the web on this topic one discovers huge lists of people seeking to help collect your bills for you for a price, of course. The length of this list implies that this is a major problem - and one that is so unpleasant that large numbers of people are willing to forego profit in order to have someone else handle this for them. Let's take a look at some processes that can be instituted in any entrepreneurial venture to help manage this challenge internally.
Before starting work on any project with a client, have a written agreement that both you and your client sign. This agreement states what you are going to do, what the fee will be, when you intend to deliver, and how the payment schedule be set up.
Make certain your invoice form is clearly laid out and easy to understand. State your payment terms in clear language and note that late payment will be assessed a finance charge. Make certain you have the correct address for billing. Some businesses have a separate business office at a separate address. Bill in a timely manner. If you have billed for services, do not expect immediate payment. Every business needs some time for processing.
You should get progress payments on all work while the work is being performed if it is going to take any more than a day or two. Common practice for sizable jobs is to request at least one third down payment, one third at a midpoint (perhaps at a review point of materials) and the balance at the time of delivery. For smaller jobs, those amounts can shift to half down at initiation of work and half at time of delivery. Money up front covers the expenses you may have in producing the products or providing the services. On each invoice add a message: "Due and payable upon receipt" so there is no question about when you expect payment.
If this job is a major commitment of you time and effort, consider obtaining permission to check the credit history of the client before you make a decision to extend credit to them. If your customer is a corporation, use Dun & Bradstreet services for checking their payment history (800-134-3867). Also check with their bank and some of their customers. Anyone seeking business from you on credit should be willing to provide references from customers. If their credit is not perfect, that does not mean you don't accept their business, but you may ask for different terms. For instance, you might request payment before shipping or completion of services. Modify the agreement in any way that makes you more comfortable about collecting the monies you are due.
In every business, no matter how careful you are, however, there needs to be an allowance for bad debt. Even with good customers there can be circumstances beyond anyone's control that prevents payment. The rule of thumb is to anticipate anywhere from two to five percent loss to bad debt. Plan at least this amount in your budget projections. Bad debt is unpleasant so it is easy to put off dealing with it. Put yourself on a schedule. For example, set aside the second Monday of each month to handle sending letters to overdue accounts, the third Wednesday to call accounts with outstanding balances, and so on for all the details of debt collection. Be certain to mail follow up invoices within a set time period. Most importantly, be persistent. If the client knows you are not going away, they are more likely to pay.
If an amount is overdue, start with a pleasant phone call. Find out what is happening. It may be there is some problem with the service that needs to be remedied or it just may have been overlooked. Get a commitment on when to expect payment. Be certain that the person you are talking to is in a position to follow through on that commitment. Be willing to work with the customer if they are having cash flow problems, perhaps with small payments over a period of time. Listen to their problems, but also be firm about your needs for payment. Be polite.
If you are not paid at this point, you need to decide how much further you want to pursue this debt on your own. Sending a registered letter with a copy of the invoice requesting the payment is a step forward while you consider your next step. Your choices at this point are using a collection agency or taking a more aggressive stance yourself. Your choice will depend on the amount of the debt, how confident you are of the parties ability to pay, and other factors you may know about the customer. Have a policy and make yourself adhere to it. Remember that this is not easy for anyone.
