How to Minimize Collections Problems and Get Paid on Time

Marco Terry
October 30, 2013
RETAIL : MANAGEMENT

Editor’s note: This article is the second in a three-part series on the subject of protecting and managing cash flow. The series addresses how to offer payment terms to commercial clients, how to prevent collections problems, and how to strengthen finances to prevent common cash-flow problems. Read part one.

Dealing with collections problems can take a toll on small business owners, especially when slow payments interfere with your ability to pay your own bills. This delay can be a major problem for small and growing companies that are not financially prepared for late payments.

This installment of my three-part series on cash flow will discuss how to avoid, or at least minimize, collections problems. I won’t offer a lesson on hardball collection tactics. Instead, I will examine how to do things the right way in the first place so that you can sidestep aggressive, resource-draining collection techniques. This approach should improve your cash flow and, hopefully, the productivity of your collections department.

First, always check the credit of your commercial and general contractor clients before offering them payment terms. Collection techniques won’t be of much help if your clients have bad commercial credit and no intention of paying.

However, working with creditworthy customers does not guarantee prompt payment. Even great customers can, and do, pay slowly. Slow payment issues arise primarily because a glass company does not follow the client’s billing procedure or there is a dispute. Handling these two issues eliminates most collections problems.

Follow the Money

Large companies, which usually have the best credit, are notorious for having procedures for everything, including paying their invoices. Many invoices are delayed unnecessarily simply because the glass company did not follow the right payment process. For example, it emailed an invoice to accounts payable, but the client required the invoice to be hand-delivered to the on-site project manager. Such procedural discrepancies can go undetected for weeks, creating payment delays and headaches for your company.

The solution is easy: At the start of the client relationship or project, always ask your point of contact, or someone in accounts payable, for their invoice payment procedure. Then, be sure to follow their requirements without exception.

Disputes Kill Cash Flow

Disputes almost always cause payment delays, especially in the construction industry. Most delays occur because the client takes delivery of the glass products but has a problem with some aspect of the order. Unfortunately, clients don’t always voice their concerns right away. Instead, you learn about the problem when you inquire about a late invoice payment 45 days later.

The easiest way to prevent disputes is to raise any issues as early as possible. An effective tool for this approach is a delivery acceptance letter: a simple, one-page document that your client signs after receiving your order or once you complete your services. The letter states that your products or services were delivered on a specific date, that they were inspected by the client company and that no issues were found at that time.

Some clients might object to signing the letter simply because they are employees of a large company and are uncomfortable signing documents. If that happens, mention that the purpose of the letter is quality control. Ideally, at that time, the client either signs the letter or identifies any potential problems with the order. This exchange gives you the option to fix the problem on the spot.

You might want an attorney to craft an acceptance letter appropriate for your business. However, keep in mind that if the letter conveys an aggressive legal tone, your client may refuse to sign it.

The author is managing director of Commercial Capital LLC, a leading provider of working capital to companies in the glass industry. Contact him at 877/300-3258.

  • Collections Strategy

    1. Do the job right

    Understand the payment clause of your client’s contract before signing it. If you use your own contracts, be sure to have a payment policy. Once the contract is signed, deliver the product/service. Upon delivery, ask the client representative to sign a delivery acceptance letter.
       
    2. Follow the invoice procedure
       
    Understand your client’s process for invoice submission and payment, and follow their instructions. If possible, include a copy of the signed delivery acceptance letter with the invoice. Including this letter might prevent problems from arising in the first place.
       
    3. Regularly check to see if your clients have paid or if they are late for payment
       
    An easy way to check is to use the accounts receivable aging report included with most accounting software packages. This report helps identify past-due invoices. If a client is late, contact them. Remember to be polite and professional in all your client interactions.
       
    4. Five days past due: No dispute
       
    If the client is five days past due, call your contact in accounts payable and ask if everything is satisfactory with the invoice and if any documentation is needed to help expedite payment. If everything is in order, ask for an expected payment date.
       
    5. Five days past due: Dispute
       
    If the client is five days past due because of a dispute, you need to determine if the dispute is valid. You may also refer your client to the signed delivery acceptance letter. This strategy tends to handle little “disputes” that are often merely used as stalling tactics. If the dispute is real, handle it promptly and make sure your client is satisfied.
       
    6. 30 days past due
       
    If the client is 30 days past the due date, send a letter advising that they are past due and request payment. Be sure to include a copy of the signed delivery acceptance letter. A letter with a cordial tone is more effective than a threatening letter that can backfire and jeopardize future business.
       
    7. 60 days past due
       
    Things get more complicated when the client is 60 days past due. At this point, if there are no disputes and if the paperwork is in order, your client probably has cash-flow problems. Call them again to inquire about the invoice and politely ask if there are any problems. Consider negotiating a payment plan with them. If they continue to stall and delay, speak to a collections attorney.
       
    8. Mind your manners
       
    Many small business owners take collections problems personally and might react in anger or in another uncivil manner. It’s understandable, since these missing payments impact your business, your cash flow and your livelihood. However, being rude seldom solves problems and can affect your reputation with potential clients.