How to Minimize Collections Problems and Get Paid on Time
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.