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Avoid cash crunch with fair collection policy... |
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Cash is the major fuel of any business. Timely collection of
receivables will help ensure that your business runs well. |
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Success in collecting receivables comes from communicating
clearly with clients, managing clients' expectations and having a consistent
policy. |
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Your credit and collection policy is a major tool in
building your business. A fair but realistic policy will bring you customers; a
tight, don't-bend-the-rules policy will lose them. |
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The policy. The ability to collect receivables on a
timely basis is established before you even meet a customer - with the creation
of a credit and collection policy. |
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Look at the standards for your in- as a guide. For example,
if norm calls for receivables to be collected in 60 days and you want cash in
30 days, you run the risk of not getting some orders. |
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Your credit and collection policy contain rules for accepting
or rejecting a customer for credit. These rules usually include terms of sale
and a credit approval process. |
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Find out the terms of sale of the most profitable players in
your industry. Also, any new credit customers should provide you with an
application, which you should follow up by checking with a major credit
bureau. |
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This is critical to minimizing collection problems. Many
firms do not do a credit check before providing goods or services to a
customer. |
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Once a credit approval process is in place, your staff should
under- stand that any exceptions can be approved only by you. |
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Your overall collection policy should be clearly stated on
your invoices. For example, you need to disclose any interest rate that will be
charged on overdue amounts. |
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Communication: The single most important element in
successful receivable collection is effective and timely communication with
customers. Most problems arise from dissatisfied customers or from clients who
don't have the money to pay your invoice. |
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It is critical in your sales process to understand the
customer's expectations; they have to be documented and confirmed with the
customer. And your goods or services have to meet or exceed them. |
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If you have done your homework and understand that a
customer cannot afford to pay for your product, you must make the appropriate
decision - you can reject the client, continue the work and hope to get paid,
or make other innovative arrangements. In selected cases, you may want to
accept shares in your customer firm as payment. |
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Managing client expectations is also critical to successful
collection. A consulting firm once provided services to a client who, after
five months, refused to pay the invoices. The client had expected the
consulting services to result in a sale for his firm; but the customer felt
that they were implicit in the assignment. A clear letter of confirmation from
the consultant to his client would have eliminated the confusion. |
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Other tools: In collecting receivables, you could require a
client to pay a significant deposit - at least one-third of the cost - and to
submit payments throughout a contract or before a good is shipped. |
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Other tactics include stopping work on projects until the
accounts are current or not shipping goods until the customer adheres to your
credit polity. Finally, be sure that you analyze your receivables at least
annually to determine patterns, which will help you with your collection. |
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Published November 9, 1998 |
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